中国小家电行业：正在进行的渠道转型能支持领导者潜在的重新评级

1、Global Research3 August 2020Initiation of CoverageChina Small Appliances SectorCan ongoing channel transformation support leaders potential re-ratings?Cautious sector view with a likely earnings downside riskWe initiate coverage of Chinas small appliances sector with a cautious view mainly due to po

2、tential earnings downside risks from: 1) persistent price competition in the next one to two years; and 2) rising consumer demand attracting more small rivals. The recent share price increases of some leading companies (Joyoung: initiate at Neutral; Supor: initiate at Sell) suggest the market has ye

3、t to price in their potential earnings downside. Our conversations with industry experts suggest the ongoing channel shift could lead to rising consolidation, which could benefit the sectors leaders. We initiate coverage on JS Global with a Buy.ASP downward trend might continue in H220 and 2021EWe s

4、ee rising online competition in the small appliances sector, as industry-wide ASP fell for the first time in recent history by 9% in 2019 and online ASP dropped 9-14% for major categories by H120 amid COVID-19. We expect the downtrend to continue in H2 and 2021 as: 1) accelerating online migration h

5、as attracted more small entrants (c.850 in April 2020 vs c.700 in January 2019 and c.550 in January 2018, per AVC), suggesting potential intensified competition; and 2) proactive destocking by distributors amid channel transformation. Both point to earnings downside risk, in our view.Rising consolid

6、ation driven by channel transformation could benefit leadersWe believe the channel transformation initiated by leading brands could increase the consolidation of major categories, as: 1) leaders strengthen their pricing advantages over small brands by eliminating different cost structures for online

7、 and offline channels; and 2) channel destocking, led by leaders, could put pressure on small brands profitability, suggesting an industry reshuffle ahead, in our view. In addition, we expect rising consumer demand to attract more small entrants, aided in particular by traffic from live-streaming an

8、d social-media-driven ecommerce.Buy on JS Global, Neutral on Joyoung and Sell on SuporWe like JS Global as the synergies derived from its two business segments could be skewed towards SharkNinja, potentially leading to higher EBIT growth for JS Global than Joyoung. On the negative side, we believe t

9、he possible ASP reductions for the industry highlight earnings downside risks for other companies, such as Joyoung and Supor.*We define small appliances as portable home appliances products.Figure 1: Valuation summaryConsumer ElectronicsChinaEquitiesChristine Peng, CFAAnalyst HYPERLINK mailto:christ

10、ine-y.peng christine-y.peng+852-2971 7571Rennie PanAnalyst S1460520030001 HYPERLINK mailto:rennie.pan rennie.pan+86-21-3866 8810CompanyMkt capCurrentPricePE (x)EV/EBITDA (x)P/BV (x)Net dividendyield (%)ROE (%)EPS CAGRPEGname(US$ m)price (LCY) target (LCY)Rating 2020E 2021E 2020E 2021E 2020E 2021E 20

11、20E 2021E 2020E 2021E20-22E 2020E 2021EJS Global3,5017.9510.40Buy24.918.311.69.62.82.52%3%11%15%35%0.70.5Midea Group67,35471.7567.77Buy20.217.112.710.04.33.82%3%23%23%15%1.31.1Joyoung4,29639.0840.00Neutral32.927.528.723.27.67.22%3%24%27%18%1.81.5Supor9,98084.8172.00Sell36.733.329.126.09.48.72%2%27%2

12、7%12%3.12.8Note: Above data as of 31 July 2020.Source: Wind, Thomson Reuters, UBS and UBS-S estimates HYPERLINK /investmentresearch /investmentresearchThis report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 28. UBS does and seeks to

13、do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.China S

14、mall Appliances SectorUBS Research THESIS MAP a guide to our thinking and whats where in this report HYPERLINK l _bookmark1 OUR THESIS IN PICTURESMOST FAVOUREDLEAST FAVOUREDJS GlobalSuporPIVOTAL QUESTIONSQ: Will the pricing downtrend continue in H220-2021E?Yes. We expect the industrys ASPs to face d

15、ownward pressure in H220 and 2021 as: 1) accelerating online migration has attracted more small entrants, suggesting potential intensified competition; and 2) distributors proactively destock amid channel transformation. HYPERLINK l _bookmark2 moreQ: How will channel transformation change the compet

16、itive landscape in the next 1-2 years? We believe channel transformation could lead to rising consolidation for major small appliance categories as: 1) leaders strengthen their pricing advantages over small brands by eliminating coststructure differences between online and offline channels; and 2) c

17、hannel destocking by leaderssqueezes small brands profitability, suggesting an industry reshuffle. HYPERLINK l _bookmark3 moreQ: Which category is best positioned?We are bullish on the home environment appliances segments growth prospects, fuelled by the vacuum cleaner sub-category, mainly due to: 1

18、) low penetration in China versus the world; 2) low concentration ratio versus other major sub-categories in China and globally; and 3) potentially rising demand post COVID-19. We think opportunities lie in the mid-range to high-end markets. HYPERLINK l _bookmark4 moreUBS VIEWWe are cautious on Chin

19、as small appliances sector mainly due to potential earnings downside risks from persistent price competition in the next 1-2 years and rising consumer demand attracting more small rivals. That said, we believe the ongoing channel transformation could spur consolidation, potentially benefiting sector

20、 leaders, including Joyoung and Supor.EVIDENCE1) Rising number of online small appliances brands in China, up from c.550 in January 2018 and c.700 in January 2019 to c.850 in April 2020. 2) Our recent conversations with some distributors indicated they have been proactively destocking recently to ad

21、apt to their new roles in the channel transformation. 3) Our recent interviews with industry experts suggest offline retail prices are on average c.10% higher than online prices due to different cost structures. 4) The combined share of the top five brands (CR5) strengthened in H120 versus H119 in t

22、he online and offline channels for most traditional major categories.WHATS PRICED IN?We think the recent share-price increases of some leading companies indicate the market has yet to price in their earnings downside risks. Joyoungs valuation (28x 2021E PE/18% earnings CAGR in 2020-22E) looks reason

23、able to us compared with domestic/global peers 31x/16% and 23x/20%, while Supor (33x 2021E PE) could be overvalued. The market could be overlooking the potential synergies from JS Globals two subsidiaries and Mideas market share consolidation potential. HYPERLINK l _bookmark5 moreIndustry outlook: W

24、e forecast a 7% CAGR in 2019-24 driven by volume growth16%14%13%7%9%8%7%6%2%6%Small appliances industrys growth breakdown20%15%10%5%0%-5%-10%-15%201520162017201820192020E2021E2022E2023E2024EVolume growth (traditional categories)Additional volume growth (emerging categories)ASP y/y growthTotal value

25、y/y growthSource: AVC, Euromonitor, UBS estimatesChina Small Appliances SectorUBS ResearchOUR THESIS IN PICTURES HYPERLINK l _bookmark0 return Small appliances market size (Rmb bn)2014-19 CAGR: 11%2019-2024E CAGR: 7%267190300250200150100We expect Chinas small appliance industry to grow at a 7% CAGR

26、in 2019-24 (including emerging sub- categories), mainly driven by volume growth.50-2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024EMarket share (retail value, 2019)Midea 26%Others 55%Supor 12%Joyoung 7%Chinas small appliances industry is fragmented and has a low entry barrier. In 2019, CR3 acc

27、ounted for c.45% of Chinas small appliances industry compared with the c.70% of the large home appliances industry.H120 ASP YoY change10%8%5%8%5%5%0%-5%-10%-15%-9%-10%-9%-14%-11%-3%We expect downward pressure on the industrys ASP to persist in H220 and 2021.Rice cookerInductioncookerPressure cookerS

28、oymilk makerFood processor*OfflineOnlineNumber of small appliances brands in China9008007006005004003002001000We think accelerating online migration has attracted more online new entrants, suggesting potential intensified competition.Jan.2017Jan.2018Jan.20194M2020OnlineOffline100%100%CR3s offline va

29、lue share93%95%88%91%95%97%96%96%120%83%85%100%80%60%40%20%We believe the channel transformation initiated by leading brands could lead to rising consolidation in major categories0%Induction cookerRice cookerPressure cooker2019Soymilk machineYTD*Food processorJuicerCost structure comparison: online

30、v. offlineOfflineOnlineEx-factory price: 100Offline retail price: 180Retail gap: 10%Online retail price: 160priceas their strengthened pricing advantages over smaller brands could accelerate the potential industry reshuffle.-20406080100120140160180Raw materialLaborManufacturing exp.Selling exp.G&A e

31、xp.Brands EBITOffline distribution exp.eCom take rateseCom operation exp. Distributor/retailers profit46%46%43%39%34%30%26%22%20%11%9%6%Online penetration (2019) Toys and Games Consumer Electronics Small AppliancesPet Care Major Appliances Apparel and Footwear Beauty and Personal CareConsumer Health

32、 Tissue and HygieneHome Care Packaged Food Personal AccessoriesFresh Food72%0% 10% 20% 30% 40% 50% 60% 70% 80%We think traffic from live-streaming and social-media- driven ecommerce could benefit small appliances online entrants, given this segments high online penetration. This could stimulate new

33、demand by creating emerging sub-categories, in our view.60%2020-22E EPS CAGR50%40%30% ElectroluxJS Global SEBWhirlpooliRobotEcovacs RoboticsBearsRATIONALJS Global is valued at 18x 2021E PE with a 35% earnings CAGR in 2020-22E compared with global peers average20%GreeZojirushi XinbaoMidea GroupJoyoun

34、gof 23x/20%. We believe this indicates it is undervalued.KingcleanSupor10%0%ArcelikRobam DeLonghiFlyco-10.020.030.040.050.060.02021E PE (x)Sources for exhibits above: Company data, All View Cloud (AVC), Euromonitor, UBS-S and UBS estimatesChina Small Appliances SectorUBS ResearchPIVOTAL QUESTIONS HY

35、PERLINK l _bookmark0 return Q: Will the pricing downtrend continue in H220- 2021E?UBS VIEWYes. We expect the industrys ASPs to face downward pressure in H220 and 2021 as: 1) accelerating online migration has attracted more small entrants, suggesting potential intensified competition; and 2) distribu

36、tors proactively destocking amid channel transformation.EVIDENCEOnline migration has been accelerating in the small appliances industry, with the online channel accounting for 46% of total sales volume in 2019, up from 32% in 2014.Along with the rapid development of the online channel, the number of

37、 online small appliances brands was also on the rise, increasing fromc.550 in January 2018 and c.700 in January 2019 to c.850 in April 2020.Our recent conversations with some small appliances distributors indicated they have been proactively destocking recently to adapt to their new roles in the cha

38、nnel transformation. They expect the destocking to last for the next one to two years.WHATS PRICED IN?We think the current valuations of some newly listed companies suggest the market has yet to price in the potential earnings downside risk caused by potentially persistent ASP reductions.Industry ov

39、erviewA fragmented market with low entry barriersWe define small appliances as portable home appliances products. According to AVC, the small appliances market was worth Rmb160bn in 2019 and had over200 sub-categories, which we further separate into three major groups: small kitchen appliances (e.g.

40、, food processors and soymilk makers); home environment appliances (e.g., vacuums and steam mops); and other (e.g., personal care products). Small kitchen appliances account for the largest sub-category, with a market size of Rmb76bn in 2019. Most listed small appliances companies in China have expo

41、sure to this category, and this will also be the focus of our discussion here. Home appliances have had the highest growth of all sub-categories, registering a 15% CAGR during 2015-19.We note there are still some emerging sub-categories not included in AVCs market size calculation, as they are too s

42、mall and fragmented to gauge. However, we believe these sub-categories should not be overlooked as their combined market size could be large.Figure 2: Small appliances market size by major categorySmall appliances market size (Rmb bn)1801601402015-19 CAGR:Small kitchen appliances: 7%28Home environme

43、nt appliances: 15% Others: 7%120216010034806057764020-20152019Small kitchen appliancesHome environment appliancesOthersSource: AVC, UBSChinas small appliances industry is fragmented. In 2019, the combined CR3 market share accounted for c.45% of Chinas small appliances industry compared with the c.70

44、% of the large home appliances industry. We estimate the rest of the companies have market shares of less than 2% each. The industry has become even more fragmented, in our view, as the volume share of the top five companies (CR5) has declined 4ppt from 2010. We think this was mainly a result of the

45、 industrys low entry barrier and shorter product lifecycles.Figure 3: Chinas small appliances market share (2019)Figure 4: CR5 has been decliningMarket share (retail value)Others 55%Midea 26%Supor 12%Joyoung 7%CR5s market share (retail volume)50%48%46%44%42%40%38%36%34%32%30%2010 2011 2012 2013 2014

46、 2015 2016 2017 2018 2019Source: AVC, Euromonitor, UBS estimatesSource: EuromonitorLow entry barrier: We think this could be attributable to competition in the upstream industries leading to products homogeneity. In contrast, the large appliances industry is highly concentrated. In 2019, the CR3 off

47、line market share by volume for air-conditioners (A/C) was 72%, washing machines (W/M) 62% and refrigerators 57%. We compare the cost structures of the small and large home appliances industries. We estimate raw material currently accounts for a lower proportion of small appliances cost of goods sol

48、d (COGS), at 75%, compared with A/Cs 85%. On the other hand, we estimate small appliances labour cost is currently higher, at 15%, compared with A/Cs 5%. We think the more labour-intensive cost structure indicates the small appliances industry may not be as scalable as large home appliances can be.F

49、igure 5: Breakdown of current COGSFigure 6: Breakdown of current raw material costsCOGS breakdown10%10%15%5%85%75%100%90%80%70%60%50%40%30%20%10%0%Small appliancesA/CRaw materialLaborManufacturing expensesRaw material cost breakdown31%27%14%10%33%22%33%30%100%80%60%40%20%0%Small appliancesA/CElectro

50、nic ComponentsCompressorMetalsPlasticPacking material, etc.Source: Company data, UBS estimatesSource: Company data, UBS estimatesLooking at a further breakdown of raw material costs, we think the main difference lies in the key components of A/C namely compressors while the other raw materials seem

51、quite similar. The compressor industry is concentrated, with the top seven companies taking over 90% of the market share in 2019. Among this, A/C leaders, Gree and Midea, control over 70% of 2019 total compressor production in China through upstream integration. Taking control of leading upstream co

52、mpanies has helped Gree and Midea to substantially lower their production costs, in our view, affording them a greater cost advantage over smaller companies. We believe the cost advantages of leading companies have mainly contributed to the high consolidation of large home appliances industry, somet

53、hing we have not witnessed in the small appliances industry.Figure 7: Gree and Midea control over 70% of Chinas total compressor production (2019)Midea and Gree control major upstream compressor suppliersLanda (Gree), 25.7%GMCC (Midea), 32.2%Highly (Gree), 12.5%Rechi, 9.5%Panasonic, 5.8%Sanyo, 2.2%M

54、itsubishi, 3.5%Others, 8.6%*Note: Gree controls 100% of Linda and 10.4% of Highly; Midea controls 60% of GMCC. Source: ChinaIOL, UBSShorter product lifecycles (three to five years compared with eight to ten years for large home appliances) have made the small appliances industry a long-tail market c

55、haracterised by the rapid emergence of new sub-categories. We think this has provided opportunities for smaller companies to grow before industry leaders enter their niche markets.Underpenetrated sector compared with the global averageChinas small appliances ownership (by value) is lower than global

56、 peers. While Chinese consumers had a disposable income of US$18,047 on average in 2019, they spent only US$64 on small appliances, lower than the global average of US$47,973 and US$181, as well as other Asian countries (Korea: US$41,814 and US$281), respectively. We believe this suggests small appl

57、iances could be an underpenetrated sector in China.Figure 8: Small kitchen appliances ownership vs. consumers disposable incomes (2019)Small kitchen appliances ownership per household (value, US$) vs. disposable income per household (US$)450400350300250200150100500R = 0.7507South KoreaJapanUSAChina-

58、20,00040,00060,00080,000100,000120,000140,000Source: Euromonitor, UBSIndustry-wide pricing trends2019 review: Market growth hindered by a significant ASP reductionThere was a significant slowdown in the small appliances market in 2019. 2019 market growth was merely 1% compared with the material grow

59、th over the past few years (a 12% CAGR in 2014-18), according to AVC. We believe small appliances market growth was largely hindered by an average 9% YoY APS reduction in 2019, the first decline in recent history. We think this reflected intensified competition driven by rising online penetration.Fi

60、gure 9: Significant ASP reductions hindered market growthSmall appliances industry growth breakdown 16% 14%9%7%1%6%-9%5%4%10%11%1%4%9%6%20%15%10%5%0%-5%-10%-15%20152016201720182019Volume y/y growthASP y/y growthValue y/y growthSource: AVC, UBSPersistent price competition in H120 amid COVID-19By anal