CITIC Construction Investment: Has Baidian's long-term pricing logic changed?

Zhitong Finance ·  Apr 24 01:56

Benchmarking overseas, with the transformation of the valuation system of mature consumer goods companies to a PB-ROE framework, there is still room for improvement in the valuation of the home appliance sector.

The Zhitong Finance App learned that CITIC Construction Investment released a research report saying that in the past, the value of the A-share home appliance sector, which is a high-quality global asset, was undervalued under the PEG model. Benchmarking overseas, with the transformation of the valuation system of mature consumer goods companies to a PB-ROE framework, there is still room for improvement in the valuation of the home appliance sector. Increased dividends play a key role in increasing the valuation of mature overseas companies. Domestic white power companies have high-quality cash flow and stable capital expenditure, and increasing dividends is expected to lead to both an increase in ROE and PE. At the same time, in recent years, home appliance brands have gone overseas and advanced are in full swing. There is also a potentially large smart home option supported by AI, and the growth of the sector cannot be ignored.

Key recommendations: High-quality white electronics leaders Midea Group (000333.SZ), Haier Smart Home (600690.SH), Hisense Home Appliances (000921.SZ), Gree Electric (000651.SH), and sector-based market opportunities that benefit from the increase in leading valuations.

CITIC Construction Investment's views are as follows:

Against the backdrop of a sharp rise in home appliances, has the past valuation system failed?

Under the PEG paradigm, growth rates are still an important factor in determining consumer stock valuations. Leading home appliance companies have passed a stage of rapid growth, and the market's expectations for future growth have begun to be adjusted. It is difficult for the market to overvalue these mature companies based on the PE-PEG framework, so high-quality white horse stocks in the home appliance sector, especially in the white electronics sector, are often thought to have limited investment space. When benchmarking overseas, it can be found that consumer companies have maintained high PE valuations even though they have already passed the high growth stage. The valuation trend in the international market may have provided a certain indication of the future path of Baidian stocks, which requires the bank to re-examine the valuation concept of Chinese consumer stocks.

Thinking about maintaining high valuations of overseas consumer stocks?

Along with the downward trend in leading growth centers of overseas consumer goods, the shift in the market pricing system from PEG to PB-ROE has become a key factor in stabilizing and even recovering valuations. ① Reviewing the market capitalization performance of leading companies in the overseas consumer industry over the past 50 years. After the maturity period, the valuations of overseas consumer companies bottomed out and rebounded along with more stable performance driving market capitalization growth; ② Even if they stop growing, leading consumers can still rely on higher ROE to maintain high earnings levels and valuation levels; ③ After entering a mature period, the revenue and performance growth rate of listed overseas consumer goods companies has further slowed down. The growth of ROE is mainly achieved through dividends and stock repurchases to reduce owners' equity.

The valuation switch depends on market cooperation. If there is no switch, how do you see PE improvement opportunities?

The bank believes that the valuation switch is actually a relatively strong market assumption, and it will take a period of time for investors or marginal capital that occupy the main position in the market to reach consensus before it can be implemented. Against the backdrop of no systematic changes in the market, the market style formed by past investors may be difficult to quickly reverse in a short period of time. If there is no significant change in the valuation system, the bank believes that ROE, the key anchor for investment in value stocks and growth stocks, also has room for improvement during the mature period. (Growth stocks are characterized by trending increases in ROE, while value stocks are characterized by high and stable ROE levels). Overseas consumer leaders generally showed an increase in ROE during the maturing period, mainly driven by increased dividends+repurchases, thereby driving PE valuations to maintain stability or repair upward movement, and did not depend on changes in market style (rising valuation in the context of ROE stability).

Focus on the domestic market: Can Baidian's valuation center continue to improve?

Based on the PB-ROE framework, the home appliance sector currently has the highest risk-return ratio, whether compared to domestic or overseas consumer companies. ① Although the overall ROE of home appliances is high, there is still plenty of room for improvement. Judging from DuPont's analysis, the high ROE of domestic home appliance companies is mainly contributed by high profit margins, and there is still room for improvement compared to Whirlpool in terms of turnover ratio and leverage ratio. ② The ROE of Gree and Midea has declined in recent years, mainly due to a sharp increase in undistributed profits, and the increase in retained earnings affected the turnover ratio of total assets, which in turn weakened ROE. ③ Can home appliance companies pay dividends? ——Strong dividend potential: Leading home appliances have plenty of cash reserves, and overall capital expenditure is manageable. Once the market style shifts to reward dividends, leading companies have plenty of room to increase dividend rates and ROE.

Are home appliance companies losing their potential to grow?

Three dimensions of home appliance growth ① Overseas home appliances are three times the volume of domestic appliances, and there is definitely plenty of room: According to Statista data, the global home appliance market revenue reached US$694.320 billion in 2022, of which China's home appliance revenue was US$177.434 billion, accounting for 25.56% of global market revenue. Domestic brands can rely on technical optimization and price advantages to compete with overseas brands to squeeze out overseas market share, thereby increasing corporate revenue. ② Consumption upgrading is still a trend. Price increases are leading the industry's growth. Against the backdrop of differences in overall “volume growth” in domestic sales, the sharp rise in volume and price led by high-end home appliances will also bring excess revenue; ③ Future conjecture: AI smart homes are expected to reshape the industry and bring about a “new energy vehicle” market. With the development and popularization of the Internet of Things, cloud computing and artificial intelligence, consumers have further sought a smart quality of life, and the smart home market has huge potential for growth.

Investment advice:

The bank believes that under the PEG model, the value of the A-share home appliance sector, which is a high-quality global asset, is undervalued. The valuation of the home appliance sector is gradually shifting from the traditional PEG system to a more mature PB-ROE system, focusing on recommending high-quality white electronics leaders Midea Group, Haier Smart Home, Hisense Home Appliances, and Gree Electric, as well as sector market opportunities brought about by the increase in leading valuations.

Risk warning: macroeconomic growth falls short of expectations, large fluctuations in raw material prices, overseas market risks, increased market competition, etc.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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