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Disclosures air conditioners should do best Prefer Buy-rated Gree (TP RMB48.80), Midea (TP to RMB46.10 from RMB49.60), QD Haier (TP to RMB18.50 from RMB17.50) The market expects subsidies on appliances. A senior economic policy official told state TV in early January that the government might introduce new measures to boost consumption of autos and appliances to help stabilise the economy. No more has been said about this, but the market is sitting up. The big three appliance makers shares rebounded 10% year-to-date (vs 6% for the CSI 300). In this report, we weigh whether the government is likely to go ahead with the idea and, if so, what a new subsidy programme might look like and how effective it might be compared with earlier ones. Dont pin too much hope on subsidies. Weve been here before, so we looked back at subsidy programmes that ran between 2009 and 2013 and found that times have changed. Indeed, we came to the following conclusions: (1) Subsidies would be just a short-term remedy. The last subsidy programmes only front loaded the demand rather than changing the long-term growth trends of the industry. (2) A new Go Rural stimulus is unlikely. Boosting demand in rural areas accounted for 56% of subsidies on appliances in the earlier programmes. A similar programme is unlikely to be launched now given the much higher penetration of appliances in rural China. (3) More spending would be needed to achieve a similar effect. The market for appliances is much larger than in 2008, and we estimate that Old for New and Energy Efficient subsidies would need to be 93% higher than under previous similar programmes to have the same effect. (4) Air conditioners make the best target. Greater penetration and sales of energy-efficient products would have the most impact. Big and small winners. If a new subsidy package were to be activated, we estimate that annual sales and net profit of the top three players would enjoy a 6% and 11% impact, respectively. But smaller players would also do well, as in past programmes. Buy on the sector, with Gree as our preferred stock. We base our bottom-up call on Gree on limited downside and the final dividend pay-out for 2018e as a potential catalyst. Our target prices for Gree, Midea and QD Haier imply 2019e PEs of 12x, 13x and 14x, respectively, and EV/EBITDA multiples of 8x, 9x, and 7x. 24 January 2019 Lina Yan* Consumer Analyst, Hong Kong and China The Hongkong and Shanghai Banking Corporation Limited linayjyanhsbc.hk +852 2822 4344 Karen Choi* Head of Consumer and Retail Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch karen.choikr.hsbc +82 2 3706 8781 Vishal Goel* Associate Bangalore *Employed by a non-US affiliate of HSBC Securities (USA) Inc. and not registered/qualified pursuant to FINRA regulations China White Goods EQUITIES DURABLE GOODS China Target price changes and summary of key metrics Current Target price _ HSBC Upside/ Market cap 3M ADTV _ PE (x) _ _ EV/EBITDA (x) _ Company Ticker Curr price New Old Rating downside (USDm) (USDm) FY17a FY18e FY19e FY17a FY18e FY19e Gree Electric 000651 CH RMB 41.30 48.80 48.80 Buy 18.2% 35,040 237 11.2 8.8 10.3 5.4 4.2 4.4 Midea 000333 CH RMB 38.91 46.10 49.60 Buy 18.5% 40,786 174 17.5 13.8 12.0 10.5 9.8 8.5 Qingdao Haier 600690 CH RMB 14.97 18.50 17.50 Buy 23.6% 13,656 54 16.5 14.2 13.1 5.6 5.2 4.4 Source: Bloomberg, HSBC estimates (priced at close of 22 January 2019) Dont pin too much hope on subsidies EQUITIES DURABLE GOODS 24 January 2019 2 New subsidies would be neither panacea nor catalyst 3 Sensitivity analysis 13 Gree (000651 CH) 15 Midea (000333 CH) 18 Qingdao Haier (600690 CH) 21 Disclosure appendix 28 Disclaimer 32 Contents 3 EQUITIES DURABLE GOODS 24 January 2019 Limited prospects of new subsidy catalyst On 8 January the vice-president of the National Development and Reform Commission (NDRC) Ning Ji Zhe told state television that the government was aiming to introduce consumption stimulus measures, including purchase incentives or subsidies for autos and home appliances, to help stabilise economic growth. There have been no further statements or information on this matter. However, in this report, we try to answer investors questions about what such measures might entail, what effect they could have, and how they might compare with those launched between 2009 and 2013. They included a Go Rural programme and an Energy Efficient programme throughout those years, as well as an Old for New programme from 2009 to 2011. Our key conclusions are as follows: Any subsidies would be just short-term remedies. The subsidies in 2009-13 only front loaded demand rather than changing the long-term trends of the industry. If we take the long view, as shown in Figure 1, the underlying retail volume CAGR for washers, fridges and air conditioners (ACs) was only 5.8%, 3.4% and 6.2% over the 2008-18 period. New subsidies would be neither panacea nor catalyst There appears to be some excitement in the market about potential new subsidies on appliances aimed at boosting consumption We do the math and find the effect of new subsidies would be less effective than previously; air conditioners would benefit most Buy with pecking order Gree (TP RMB48.80), Midea (TP RMB46.10 versus RMB49.60 before) and QD Haier (TP RMB18.50 versus RMB17.50 before) EQUITIES DURABLE GOODS 24 January 2019 4 Figure 1. Retail volume CAGR (2008-18) Source: CMM, HSBC A new Go Rural push is unlikely. Among the 2009-13 subsidy programmes, Go Rural was the most important. It accounted for 56% of the total subsidies given out by the government and 44% of the total retail demand created under the subsidy programmes. However, the rural penetration of appliances is much higher now than in 2008. For example, the rural penetration for fridges and washers reached 92% and 84% in 2017 compared with 30% and 49% in 2008. Under the old Go Rural programme, the total subsidy given amounted RMB82bn and led to appliance sales of 275m units. We estimate that a new Go Rural programme can only stimulate appliance demand by 70m units with a total subsidy size of RM28bn. The potential for a new Go Rural is unlikely because there is limited room for further growth in the rural penetration of washer and fridges and the rural penetration for AC and water heaters is constraints on rural infrastructure. Figure 2. Old versus new subsidy programmes Source: Ministry of Commerce, HSBC estimates 5 . 8 %3. 4 %6. 2 %0. 0%1. 0%2. 0%3. 0%4. 0%5. 0%6. 0%7. 0%W as hers F ri d g e s A ir c o n d it io n e rsR e t a il V o lu m e C A G R (2 0 0 8 -2 0 1 8 )152 , 0302 7 , 9 0 97 8 , 9 1 945, 2014 . 0 %- 6 5 . 8 %1 0 9 . 8 %6 8 . 4 %-8 0 . 0 %-6 0 . 0 %-4 0. 0%-2 0 . 0 %0. 0%2 0 . 0 %40 . 0%6 0 . 0 %8 0 . 0 %10 0. 0%1 2 0 . 0 %020 , 00 04 0 , 0 0 060 , 00 08 0 , 0 0 010 0, 00 01 2 0 , 0 0 014 0, 00 01 6 0 , 0 0 0T o t a l 3 N e w p ro g ra m m e s N e w “ G o R u ra l“ N ew “ Ol d f o r N ew “ N e w “ e n e rg y e f f ic ie n t “RMB millionS u b s id y S iz e % c h a n g e in n e w s u b s id y s iz e t o o ld p ro g r a m m e5 EQUITIES DURABLE GOODS 24 January 2019 Figure 3. Effectiveness of 2009-13 programmes Source: Ministry of Commerce, HSBC estimates More spending is needed to achieve a similar effect to that of the 2009-13 programmes: As Figures 2 and 3 show, to have an effect similar to that of the last Old for New and Energy Efficient programmes based on (1) the ratio of subsidised appliances to the annual retail volume (year before the programme) and (2) the level of subsidy to retail price ratio, the total subsidy needed would be RMB124bn. This would be 93% higher than the total RMB64bn spent under the old programmes. A new subsidy programme aimed at ACs would be most effective. As we show in Figure 4, by boosting the urban ownership penetration and that of Energy Efficient types I and II, a new AC subsidy programme would boost total AC sales by 111m units with a subsidy programme size of RMB56bn. Figure 4. New subsidy aimed at ACs only Source: Ministry of Commerce, HSBC estimates 200. 3 %3 2 . 6 %6 7 . 2 % 6 7 . 2 %8. 6 % 8 . 6 %0. 0%50 . 0%10 0. 0%15 0. 0%2 0 0 . 0 %2 5 0 . 0 %O ld N ew Old N ew O ld N ewG o R ur al E ne r gy ef f ic ie nt Old f or N ewas % of re t ai l v ol um e be f or e t he s ub s id y s t ar t ed as % of t ot al applianc es ow ned1 1 0 . 87 2 . 438 . 413 2. 0 %8 6 . 2 %45 . 8 %0. 0%20. 0%40. 0%60. 0%80. 0%100 . 0%120 . 0%140 . 0%0 . 020. 040. 060. 080. 01 0 0 . 01 2 0 . 0T o t a l I n c r e m e n t a l D e m a n d Pe ne t ra t ion D e m an d En er gy Ef f ic ien t D em andmillion unitsN o . o f a p p lia n c e s s o ld u n d e r t h e p ro g ra m m e (m u n it s ) A s % o f A C re t a il v o lu m eEQUITIES DURABLE GOODS 24 January 2019 6 Appliance subsidy programmes 2009-13 In Figure 6, we summarise the amount of subsidy, the units of appliances sold under the subsidy programmes and the retail value of appliances sold during the periods. Figure 6: Appliance subsidies, 2009-13 Go Rural Old for New Energy Efficient New Energy Efficient Annual total Y-o-y diff Total subsidy (RMBm) 2009 8,974 1,750 2,000 12,724 2010 16,934 12,375 9,540 38,849 26,125 2011 28,597 23,500 3,103 55,200 16,351 2012 27,197 900 28,097 (27,104) 2013 11,300 11,300 (16,797) Total 81,703 37,625 14,643 12,200 146,171 Total number of appliances subsidised (m) 2009 37 5 5 47 2010 61 32 29 122 75 2011 94 44 16 154 32 2012 83 5 88 -67 2013 60 60 -27 Total 275 81 50 65 471 Retail sales of appliances subsidised (RMBm) 2009 69,033 17,500 22,222 108,755 2010 130,262 123,750 106,000 360,012 251,257 2011 219,980 235,000 34,478 489,457 129,445 2012 209,206 18,443 227,649 (261,808) 2013 231,557 231,557 3,908 Total 628,481 376,250 162,700 250,000 1,417,431 Source: Ministry of Commerce In 2011, both the subsidy amount and the new appliance sales under the subsidy programmes peaked at RMB55.2bn and RMB489bn, respectively. In 2012, the scale of the subsidy programme shrunk y-o-y and all programmes ended in 2013. In Figure 5, we summarise the appliance subsidy programmes initiated by the Chinese government to stimulate consumption. Figure 5: Appliances subsidies, 2009-13 Go Rural Old for New Energy Efficient New Energy Efficient Trial coverage Shandong, Henan, Sichuan + 14 provinces/cities include Jiangsu, Zhejiang, Anhui, Henan 9 provinces & cities: Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang, Shandong, Guangdong, Fuzhou, Changsha Trial period December 2007 to December 2011 + December 2008 to December 2012 June 2009 to May 2010 National implementation Nationwide June 2010 to 23 provinces/cities and April 2011 to Nationwide from Nationwide Nationwide Period February 2009 to February 2013 June 2010 to December 2011 June 2009 to May 2011 June 2012 to May 2013 Subsidy subject Rural residents Urban and rural residents Urban and rural residents Urban and rural residents Subsidy range 13% 10% about 9% of AC retail price 4.9% (3-23%), 3-12% for ACs, 8-12% for LCD TVs, 7-12% for refrigerators, 5-23% for washers Subsidised categories 16 kinds, including TVs, refrigerators, washing machines, ACs, water heaters, etc. 13 kinds, including TVs, refrigerators, washing machines, ACs, water heaters, etc. Air conditioners, or average RMB293 subsidy per units Five kinds, including ACs, TVs, refrigerators, washing machines, water heaters Fiscal source Central government (80%), Local government (20%) Central government (80%), Local government (20%) Central government (100%) Central government (100%) Source: Ministry of Commerce 7 EQUITIES DURABLE GOODS 24 January 2019 As shown in Figure 7, the retail sales of the big three appliance categories (washers, fridges and ACs) dropped by 14% after delivering an annual CAGR of 15% over the 2008-11 period. Figure 7: Appliance subsidy versus industry growth Source: Ministry of Commerce, CMM The impact on companies in 2009-13 White goods manufacturers directly benefited from the subsidy programmes, in our view. Firstly, on sales, the domestic revenue of the top three white goods makers over the 2009-13 period registered a CAGR of 23.8%. Figure 8: Top three appliance makers domestic revenue Source: Company Reports However, the subsidy programme benefited smaller players more than the top players. In Figure 9, we show Gree and Mideas share in the bidding results of the Go Rural programme. 1 2 . 738 . 8 5 5 . 2 28. 111 . 310 8. 83 6 0 . 04 8 9 . 5227 . 6 2 3 1 . 61 4 . 5 %2 4 . 1 %7. 0 %- 14 . 5 %12 . 9%-1 0 0 . 0 %-8 0 . 0 %-6 0. 0%-4 0. 0%-2 0 . 0 %0. 0%20 . 0%40 . 0%0 . 0100. 0200. 0300. 0400. 0500. 0600 . 0700 . 0800. 02009 2010 2011 2012 2013RMB billonT ot al s ub s id y Appli anc e ret ail s a les under s ubs idy progr am sW as he r+ F ri dg e+ A C R et ai l V al ue Y oY % ( R H S )R et ai l C A G R (2 00 9 - 11)15 . 2 %T o p 3 T o tal39 . 9%G r ee38 . 5 %M i d ea4 9 . 5 %Q i n g d a o H a i e r100 . 31 7 4 . 021 0. 9 19 9. 62 3 5 . 57 3 . 4 %2 1 . 2 %- 5 . 4 %1 8 . 0 %-1 0 0 . 0 %-8 0 . 0 %-6 0 . 0 %-4 0. 0%-2 0. 0%0. 0%2 0 . 0 %4 0 . 0 %6 0 . 0 %8 0 . 0 %10 0. 0%0 . 0100. 0200 . 0300. 0400 . 0500 . 0600. 02009 2010 2011 2012 2013RMB billonT op 3 do m es t ic re v en ue Y oY % (R H S )C A G R ( 2009 - 13 )23 . 8%T o p 3 T o ta l2 9 . 0 %G r ee1 4 . 4 %M i d ea28 . 6 %Q i n g d a o H a i e rEQUITIES DURABLE GOODS 24 January 2019 8 Figure 9: Gree and Mideas share in the bidding for the Go Rural programme Results announcement date 5-Mar-09 14-May-09 11-Feb-10 15-Nov-10 30-Dec-11 % of total models winning the bids Gree 6% 6% 7% 8% 8% Midea 6% 6% 7% 8% 6% Annual market share (% value) 2009 2009 2010 2011 2012 Gree 28% 28% 28% 32% 36% Midea 26% 26% 26% 27% 27% Source: Ministry of Commerce Secondly, on margins, the subsidy received by white goods manufacturers contributed significantly to their earnings during the period. In 2010, government grants accounted for 58.4% of the top three white goods makers net profit and that dropped to 7% in 2013. Figure 10: Government grants as % of net profits Source: Ministry of Commerce, Company reports Lastly, on valuation, the top threes one-year forward PE averaged 13.5x during the 2009-11 period versus an average PE of 10.9x from January 2009 to the present. Figure 11: Top threes one-year-forward PE weighted by market cap Source: Bloomberg 5 8 . 4 %2 3 . 9 %1 0 . 5 %7. 3%5 2 . 5 %34. 8%9. 9% 6 . 1 %83 . 4%1 9 . 1 %1 8 . 9 %1 3 . 5 %32. 5%9. 5%2. 7%2 . 7 %0. 0%1 0 . 0 %20 . 0%30 . 0%4 0 . 0 %5 0 . 0 %60 . 0%7 0 . 0 %8 0 . 0 %90 . 0%2010 2011 2012 2013T op 3 T ot al Gree M id e a Qi ng dao H aie rN et Pr o fi tC A G R (2 0 1 0 - 13)29. 2%36. 5%19. 4%27. 0%1 3 . 58. 310 . 810 . 95. 07. 09. 01 1 . 01 3 . 015 . 017 . 01 9 . 02 1 . 0J a n -0 9 J a
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