After going through significant volatility before the Spring Festival, we still believe that the home appliance sector is highly likely to outperform the broader market in the post-holiday period. During the ongoing systemic risk adjustment, home appliance stocks have shown better resilience compared to the overall market. Although the unexpected appreciation of the renminbi has negatively impacted the export segment, strong domestic demand continues to provide solid fundamentals for the industry.
In January, sales of air conditioners and water heaters exceeded expectations, while large kitchen appliances also showed strong performance. Specifically: 1) Despite a high base from the previous year, air conditioner retail sales in January surpassed forecasts, with offline sales rising by 14% and online sales jumping by 147%, according to AVC retail monitoring. 2) Water heater sales also performed well, with online sales up 73% and offline sales increasing by 18%. 3) This surge is largely attributed to the colder winter this year, which boosted demand for heating appliances. 4) Large kitchen appliances saw impressive growth as well, with online sales surging by 132% year-on-year and offline sales growing by 5%.
However, demand for refrigerators, washing machines, and environmental cleaning products remained weak in January.
Despite this, the trend in home appliance stocks remained positive, driven by increased market concentration. For example, Haier's washing machine sales showed strong performance, with online sales up 67% and offline sales rising by 4% in January.
As February approached, the valuations of key home appliance stocks began to stand out. For instance, Gree Electric and Midea Group were trading at 13x and 17x their 2018 earnings estimates, respectively. Many previously overvalued stocks are now trading below 30x 2018e P/E. In addition to the challenges posed by exchange rate fluctuations in the export market, the sector still benefits from strong fundamentals, particularly in air conditioning and water heater segments, where sales have outperformed expectations. Given these factors, there is a strong case to buy aggressively when stock prices dip.
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