China Home Appliances:Investors’key debates post 3Q17results,we remain bullish

We remain positive on the Chinese home appliances sector; we prefer airconditioner players as we expect further benefits from the restocking cycle.

    Despite PE valuations being at mean plus two standard deviations, they remainbelow the last peak cycle seen in 2009-11. As we see the sector entering intostructural growth, driven by consumption upgrade, in this report we lift ourearnings by 6%~16% and argue for further re-rating. We also provide ourviews on the key investors' concerns post 3Q results.

    Property market slowdown and the high base have been investors’ mainconcerns. In general, home appliance corporates expect decelerated salesYoY into 4Q17 but also see structural drivers to cushion the slowdown(this is similar to our channel check). Gree likely faces the highest base in4Q17 (4Q16 gross sales up 63% YoY), but it remains confident on the4Q17 outlook, thanks to distributors’ strong commitment to restocking(note advanced payment increased 141% YoY in 3Q17). Midea forecasts adeclaration for 4Q17 sales YoY, but remains confident of delivering doubledigitppt sales growth for both 4Q17 and 2018 (more sustainable than ourexpectation), partly thanks to a strong air conditioner replacement cycle.

    Qingdao Haier focuses on premiumization and market share expansion.

    Management noted that its high-end Casarte brand grew 41% YoY during9M17. Robam’s 3Q17 revenue deceleration (to 23% vs. 27% in 1H17), ontop of Midea and Qingdao Haier’s comments on kitchen applianceexpansion triggered some concerns. Having said that, we remain confidentin Robam’s 2018 sales guidance, of up 25-30% YoY.

    n Raw material cost hikes: in line with our channel checks, raw material isnot a major concern for players under our coverage. Midea indicated its airconditioner gross margin improved by 3ppt YoY in 3Q17, thanks to pricehikes and better mix. Midea believes the margin drivers are sustainableand could be strengthened by further price hikes especially for exportproducts in 2H17. Gree is also considering increasing air conditioner retailprices for model year 2018 (which started August 2017). Qingdao Haierdelivered the most earnings upside in 3Q17, partly thanks to a resilientgross margin YoY driven by better product and brand mix. Robam’s grossmargin decline (by 5ppt YoY) in 3Q17 sparked investor discussions, but itremains confident of a mild margin expansion driven by product mix.

    n Synergy: Qingdao Haier’s joint procurement synergy with GE was thesingle-largest upside surprise in 3Q17, and likely a major driver behind itsrecent outperformance. Midea’s integration with Toshiba and KUKA camein slightly behind vs. our original expectation, due to FX headwinds andKUKA’s capacity bottleneck, respectively. Having said that, most investorsare not concerned about Midea’s execution.