Global Research 3 August 2020
Initiation of Coverage
China Small Appliances Sector Equities
Can ongoing channel transformation support China leaders' potential re-ratings? Consumer Electronics Christine Peng, CFA Analyst [email protected] Cautious sector view with a likely earnings downside risk +852-2971 7571 We initiate coverage of China’s small appliances sector with a cautious view mainly due Rennie Pan to potential earnings downside risks from: 1) persistent price competition in the next Analyst one to two years; and 2) rising consumer demand attracting more small rivals. The S1460520030001 recent share price increases of some leading companies (Joyoung: initiate at Neutral; [email protected] Supor: initiate at Sell) suggest the market has yet to price in their potential earnings +86-21-3866 8810 downside. Our conversations with industry experts suggest the ongoing channel shift could lead to rising consolidation, which could benefit the sector’s leaders. We initiate coverage on JS Global with a Buy. ASP downward trend might continue in H220 and 2021E We see 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 has 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 consolidation driven by channel transformation could benefit leaders We 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 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 and social-media-driven ecommerce. Buy on JS Global, Neutral on Joyoung and Sell on Supor We 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 the 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 summary
Net dividend Company Mkt cap Current Price PE (x) EV/EBITDA (x) P/BV (x) yield (%) ROE (%) EPS CAGR PEG name (US$ m) price (LCY) target (LCY) Rating 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 20-22E 2020E 2021E JS Global 3,501 7.95 10.40 Buy 24.9 18.3 11.6 9.6 2.8 2.5 2% 3% 11% 15% 35% 0.7 0.5 Midea Group 67,354 71.75 67.77 Buy 20.2 17.1 12.7 10.0 4.3 3.8 2% 3% 23% 23% 15% 1.3 1.1 Joyoung 4,296 39.08 40.00 Neutral 32.9 27.5 28.7 23.2 7.6 7.2 2% 3% 24% 27% 18% 1.8 1.5 Supor 9,980 84.81 72.00 Sell 36.7 33.3 29.1 26.0 9.4 8.7 2% 2% 27% 27% 12% 3.1 2.8 Note: Above data as of 31 July 2020. Source: Wind, Thomson Reuters, UBS and UBS-S estimates
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This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 28. UBS does and seeks to 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 Small Appliances Sector
P2 UBS Research THESIS MAP a guide to our thinking and what's where in this report OUR THESIS IN PICTURES
MOST FAVOURED LEAST FAVOURED
JS Global Supor
PIVOTAL QUESTIONS Q: Will the pricing downtrend continue in H220-2021E? Yes. We expect the industry’s 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) distributors proactively destock amid channel transformation. more
Q: How will channel transformation change the competitive 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 cost structure differences between online and offline channels; and 2) channel destocking by leaders squeezes small brands' profitability, suggesting an industry reshuffle. more
Q: Which category is best positioned? We are bullish on the home environment appliances segment’s growth prospects, fuelled by the vacuum cleaner sub-category, mainly due to: 1) 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. more
UBS VIEW We are cautious on China’s 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 leaders, including Joyoung and Supor.
EVIDENCE 1) 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 adapt 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 the online and offline channels for most traditional major categories.
WHAT'S 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. Joyoung’s valuation (28x 2021E PE/18% earnings CAGR in 2020-22E) looks reasonable 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 Global’s two subsidiaries and Midea’s market share consolidation potential. more
Industry outlook: We forecast a 7% CAGR in 2019-24 driven by volume growth
Small appliances industry's growth breakdown 16% 20% 14% 13% 15% 9% 7% 8% 7% 10% 6% 6% 2% 5% 0% -5% -10% -15% 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E Volume growth (traditional categories) Additional volume growth (emerging categories) ASP y/y growth Total value y/y growth
Source: AVC, Euromonitor, UBS estimates
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China Small Appliances Sector UBS Research
P3 OUR THESIS IN PICTURES return
Small appliances market size (Rmb bn) 300 2014-19 CAGR: 11% 267 250 2019-2024E CAGR: 7%
190 200 We expect China’s small appliance industry to grow at a 150 7% CAGR in 2019-24 (including emerging sub- categories), mainly driven by volume growth. 100
50
- 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E
Market share (retail value, 2019)
Midea 26%
China’s small appliances industry is fragmented and has a low entry barrier. In 2019, CR3 accounted for c.45% of Others China’s small appliances industry compared with the 55% c.70% of the large home appliances industry. Supor 12%
Joyoung 7%
H120 ASP YoY change 10% 8% 8% 5% 5% 5%
0%
-5% -3% We expect downward pressure on the industry’s ASP to persist in H220 and 2021.
-10% -9% -9% -10% -11% -15% -14% Rice cooker Induction Pressure Soymilk maker Food cooker cooker processor*
Offline Online
Number of small appliances brands in China 900 800 700 600 500 We think accelerating online migration has attracted 400 more online new entrants, suggesting potential 300 intensified competition. 200 100 0 Jan.2017 Jan.2018 Jan.2019 4M2020
Online Offline
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CR3's offline value share
120%
100% 100% 97% 96% 96% 95% 95% 93%
100% 91% 88% 85% 83% 80%
60% We believe the channel transformation initiated by 40% leading brands could lead to rising consolidation in major categories… 20%
0% Induction Rice cooker Pressure Soymilk Food Juicer cooker cooker machine processor 2019 YTD*
Cost structure comparison: online v. offline
Offline
Ex-factory price: 100 Offline retail price: 180 Online retail price: 160
Retail price …as their strengthened pricing advantages over smaller Online gap: 10% brands could accelerate the potential industry reshuffle.
- 20 40 60 80 100 120 140 160 180
Raw material Labor Manufacturing exp. Selling exp. G&A exp. Brand's EBIT Offline distribution exp. eCom take rates eCom operation exp. Distributor/retailer's profit
Online penetration (2019) Toys and Games 72% Consumer Electronics 46% Small Appliances 46% Pet Care 43% Major Appliances 39% We think traffic from live-streaming and social-media- Apparel and Footwear 34% driven ecommerce could benefit small appliances online Beauty and Personal Care 30% entrants, given this segment’s high online penetration. Consumer Health 26% Tissue and Hygiene 22% This could stimulate new demand by creating emerging Home Care 20% sub-categories, in our view. Packaged Food 11% Personal Accessories 9% Fresh Food 6% 0% 10% 20% 30% 40% 50% 60% 70% 80%
60% RATIONAL
50% Electrolux 40% JS Global Ecovacs Robotics 30% SEB JS Global is valued at 18x 2021E PE with a 35% earnings iRobot Whirlpool
- 22EEPS CAGR Bears CAGR in 2020-22E compared with global peers' average Zojirushi Xinbao 20% Gree of 23x/20%. We believe this indicates it is undervalued. Midea GroupJoyoung 2020 Kingclean Supor 10% Arcelik Robam De'LonghiFlyco
0% - 10.0 20.0 30.0 40.0 50.0 60.0 2021E PE (x)
Sources for exhibits above: Company data, All View Cloud (AVC), Euromonitor, UBS-S and UBS estimates
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China Small Appliances Sector UBS Research
Sector Q1 PIVOTAL QUESTIONS return
Q: Will the pricing downtrend continue in H220- 2021E?
UBS VIEW Yes. We expect the industry’s 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) distributors proactively destocking amid channel transformation.
EVIDENCE
. Online 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 online small appliances brands was also on the rise, increasing from c.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 channel transformation. They expect the destocking to last for the next one to two years.
WHAT'S 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 overview
A fragmented market with low entry barriers
We define small appliances as portable home appliances products. According to AVC, the small appliances market was worth Rmb160bn in 2019 and had over 200 sub-categories, which we further separate into three major groups: small kitchen appliances (e.g., 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 exposure 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 AVC’s market size calculation, as they are too small and fragmented to gauge. However, we believe these sub-categories should not be overlooked as their combined market size could be large.
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Figure 2: Small appliances’ market size by major category
Small appliances' market size (Rmb bn) 180 2015-19 CAGR: Small kitchen appliances: 7% 160 Home environment appliances: 15% Others: 7% 28 140
120 60 100 21
80 34 60
40 76 57 20
- 2015 2019 Small kitchen appliances Home environment appliances Others
Source: AVC, UBS
China’s small appliances industry is fragmented. In 2019, the combined CR3 market share accounted for c.45% of China’s small appliances industry compared with the c.70% 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 industry’s low entry barrier and shorter product lifecycles.
Figure 3: China’s small appliances – market share (2019) Figure 4: CR5 has been declining
CR5's market share (retail volume) Market share (retail value) 50% Midea 48% 26% 46% 44% 42% 40% Others 38% 55% Supor 36% 12% 34% 32% Joyoung 7% 30% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: AVC, Euromonitor, UBS estimates Source: Euromonitor
Low 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 offline 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 sold (COGS), at 75%, compared with A/C’s 85%. On the other hand, we estimate small appliances’ labour cost is currently higher, at 15%, compared with A/C’s 5%. We think the more labour-
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intensive cost structure indicates the small appliances industry may not be as scalable as large home appliances can be.
Figure 5: Breakdown of current COGS Figure 6: Breakdown of current raw material costs
COGS breakdown Raw material cost breakdown
100% 100% 10% 10% 90% 5% 31% 27% 80% 15% 80% 70% 10% 60% 14% 60% 50% 22% 33% 85% 40% 40% 75% 30% 20% 33% 20% 30% 10% 0% 0% Small appliances A/C Small appliances A/C Electronic Components Compressor Raw material Labor Manufacturing expenses Metals Plastic Packing material, etc. Source: Company data, UBS estimates Source: Company data, UBS estimates
Looking 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 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 companies 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, something we have not witnessed in the small appliances industry.
Figure 7: Gree and Midea control over 70% of China’s total compressor production (2019)
Midea and Gree control major upstream compressor suppliers
Landa (Gree), Highly (Gree), 25.7% 12.5%
Rechi, 9.5%
Panasonic, 5.8%
Sanyo, 2.2%
Mitsubishi, 3.5% GMCC (Midea), 32.2% Others, 8.6%
*Note: Gree controls 100% of Linda and 10.4% of Highly; Midea controls 60% of GMCC. Source: ChinaIOL, UBS
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Shorter 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 characterised 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 average
China’s small appliances ownership (by value) is lower than global 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$281), respectively. We believe this suggests small appliances could be an underpenetrated sector in China.
Figure 8: Small kitchen appliances’ ownership vs. consumers’ disposable incomes (2019)
Small kitchen appliances' ownership per household (value, US$) vs. disposable income per household (US$) 450 R² = 0.7507 400 350 300 South Korea USA 250 Japan 200 150 100 50 China 0 - 20,000 40,000 60,000 80,000 100,000 120,000 140,000
Source: Euromonitor, UBS
Industry-wide pricing trends
2019 review: Market growth hindered by a significant ASP reduction
There was a significant slowdown in the small appliances market in 2019. 2019 market growth was merely 1% compared with the material growth 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.
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Figure 9: Significant ASP reductions hindered market growth
Small appliances industry growth breakdown 20% 16% 14% 15% 6% 9% 10% 7% 9% 1% 4% 5% 10% 11% 6% 4% 5% 1% 0%
-5% -9%
-10%
-15% 2015 2016 2017 2018 2019 Volume y/y growth ASP y/y growth Value y/y growth Source: AVC, UBS
Persistent price competition in H120 amid COVID-19 By analysing the seven major kitchen appliances sub-categories, we find H120 online ASPs declined 9% YoY, to 14%, while offline ASPs stayed firmed for most categories (excluding food processor). On top of this, the H120 ASPs of traditional sub-categories (such as rice cookers) declined more significantly than new categories (such as food processors), especially in the online channel, which we think is primarily due to some offline distributors’ channel destocking. Figure 10: YoY ASPs change of major categories (H120)
10% 8% 8% 5% 5% 5%
0%
-5% -3%
-10% -9% -9% -10% -11% -15% -14% Rice cooker Induction cooker Pressure cooker Soymilk maker Food processor*
Offline Online
Source: AVC, UBS
Anticipating persistent downward pressure on ASP in H220E and into 2021E Accelerating online migration potential post COVID-19
Online migration has been accelerating in the small appliances industry, with online accounting for 46% of total sales volume in 2019, up from 32% in 2014. We expect the industry to have a higher proportion of online sales from 2020 and onwards, given consumers’ evolving purchasing habits, which has become more apparent amid the COVID-19 outbreak. We think small appliances are suitable for online purchasing, as products are typically standardised, have low ticket values and require no installation.
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Figure 11: Rising online penetration of small appliances industry
China's small appliances online penetration (retail volume) 50% 46% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Euromonitor
This has attracted more small entrants
Along with the rapid development of online channel, the number of online small- appliances brands was also on the rise, increasing from c.550 in January 2018 and c.700 in January 2019 to c.850 in April 2020. We believe this suggests intensified competition lies ahead. We think consumers’ diverse demand has attracted more small entrants to the market, which are largely supported by traffic from live- streaming and social-media-driven ecommerce.
Figure 12: The number of online small appliances brands are on the rise
Number of small appliances brands 900 800 700 600 500 400 300 200 100 0 Jan.2017 Jan.2018 Jan.2019 4M2020 Online Offline Source: AVC, UBS
Pricing of products sold online are much lower than those sold offline
We think brands adopt more conservative pricing strategies for the online channel as online consumers can easily compare prices among different brands and are therefore more price-sensitive. Among the four major small appliances categories (namely, rice cookers, pressure cookers, soymilk machines and food processors), online products were priced 40-80% lower than those sold offline in 2019, according to AVC.
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Figure 13: Online vs. offline ASPs of major categories (Rmb/unit, 2019)
1,200 986 1,000
800 669 506 600 554 392 400 289 233 159 200
- Rice cooker Pressure cooker Soymilk machine Food processor Offline Online
Source: AVC
Proactive destocking by offline distributors amid industry- wide channel transformation Where home appliances distributors were previously middle men in the industry, they have come to provide more service-oriented functionalities amid the ongoing channel transformation. Our recent conversations with some small appliances distributors indicated they have been proactively destocking recently to adapt to their new roles in the channel transformation. They expect the destocking to last for the next one to two years.
We expect destocking activities of the home appliances industry to accelerate in H220 and 2021, given potentially rising online sales post COVID-19. On top of this, we believe consumers will likely seek lower-priced alternatives online owing to their possibly weaker purchasing power.
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China Small Appliances Sector UBS Research
Sector Q2 PIVOTAL QUESTIONS return
Q: How will channel transformation change the competitive landscape in the next 1-2 years?
UBS VIEW 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 cost structure differences between online and offline channels; and (2) channel destocking by leaders squeezes small brands' profitability, suggesting an industry reshuffle. In addition, we expect an expanding variety of consumer demand to attract more small entrants, supported by traffic from live streaming and social driven ecommerce. We forecast a 7% CAGR for small home appliances market revenue in 2019-24E, primarily driven by volume.
EVIDENCE
. Our recent interviews with industry experts suggest that, on average, offline retail prices are around 10% higher than online prices due to different cost structures. To illustrate, a product with a Rmb100 ex- factory price could be sold for Rmb180 in an offline channel but for Rmb160 in an online channel.
. The combined market share of the top three offline brands (CR3) has strengthened in 2020 YTD versus 2019 for most major categories, while online CR3 have largely remained stable despite intensified competition.
. UBS Internet team estimates China's live streaming penetration of ecommerce to reach 12.2% by 2022E and live streaming ecommerce GMV to reach Rmb2,171bn in 2022E, growing at a 71% CAGR over 2019-22E, more than triple China's online retail sales growth rate.
. Food and beverages, personal care products, and small appliances are the most popular categories purchased through live streaming as end-2019, according to iiMedia.
WHAT'S PRICED IN? We think channel transformation could lead to rising consolidation for major categories of the small appliances sector in the next 1-2 years. This, however, is not fully reflected in the current valuations of some leading players, in our view. New industry dynamics #1 Channel transformation could lead to rising consolidation for major categories Leaders to strengthen pricing advantages over small brands
In recent years, traditional distribution channels have been losing share to online and chain stores that offer similar products at lower prices, in addition to stagnating growth as China's economy stabilises. Against such a backdrop, some home appliances brands have started channel transformation to defend their
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territory against online players. To be specific, brands are improving their pricing competitiveness by eliminating the cost structure differences between online and offline.
Our recent interviews with industry experts suggest that, on average, offline retail prices are c.10% higher than online due to different cost structures. To illustrate, a product with Rmb100 ex-factory price could be sold at Rmb180 in an offline channel, but sell for Rmb160 in an online channel. We attribute the lower online mark-up rate (retail price/ex-factory price) mainly to higher sales efficiency given less distribution layers.
Figure 14: Cost structure comparison: online vs offline
Offline
Ex-factory price: 100 Offline retail price: 180 Online retail price: 160
Retail price Online gap: 10%
- 20 40 60 80 100 120 140 160 180
Raw material Labor Manufacturing exp. Selling exp. G&A exp. Brand's EBIT Offline distribution exp. eCom take rates eCom operation exp. Distributor/retailer's profit
Source: UBS Research
We think leading brands could begin to offer more value-for-money as they re-invest cost savings from reducing distribution layers into pricing. Greater pricing advantages over smaller brands could lead to rising consolidation in offline channels, in our view. However, we think leading brands will be more focused on the major categories where they already have a strong presence.
Potential industry reshuffle as leaders destock channels
In addition, we think continuous destocking led by leading brands could put pressure on smaller brands' profitability, in addition to their cash flow pressure under COVID-19. This could force more small brands to quit the industry.
Rising consolidation in major categories
We think the consolidation trend could be evidenced by the latest data from AVC. The combined share of the top five brands (CR5) strengthened in H120 versus H119 in both online and offline channel for most traditional major categories (ie, rice cooker, food processor, induction cooker). In contrast, CR5 for new categories (ie, juicer, blender, frying and baking machine) mostly declined in both channels, which we think reflects rising competition.
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Figure 15: Offline CR5 value share Figure 16: Online CR5 value share
CR5 Offline value share CR5 Online value share
120% 120% 100%
100% 99% 99% 99% 98% 98% 98% 98% 97% 97%
97% 95% 95% 94%
93%
92% 91% 90% 89% 89% 89% 87% 87% 87% 87% 100% 100% 79% 79% 77% 76% 76% 73% 71% 71% 68% 68% 65% 64% 80% 80% 63% 55% 60% 60% 40% 40% 20% 20% 0% 0% Juicer Juicer Blender Blender Health pot Health Health pot Health Rice cookerRice Rice cookerRice Foodprocessor Foodprocessor Pressure cooker Pressure cooker Electronic kettle Electronic Electronic kettle Electronic Soymilk machine Induction cooker Induction Soymilk machine Induction cooker Induction Frying & baked machine baked & Frying H119 H120 H119 H120 machine baked & Frying Traditional major categories New categories Traditional major categories New categories Source: AVC Source: AVC
#2 Category expansion as more brands join the market
Expecting more small entrants supported by traffic from live streaming and social driven ecommerce Consumer demand has become more fragmented and variable. We expect more small online brands to cater to this rising niche demand, supported especially by traffic from live streaming and social driven ecommerce. We think small appliances are well suited for live streaming ecommerce as they are standardised, low ticket value, and require no installation. We expect the strong momentum of growing emerging categories could continue in 2020 and onwards, as more brands develop and improve their online operations.
Industry outlook: 2019-24E market revenue CAGR of 7%, driven by volume growth
At the beginning of this report we noted that some emerging categories are not included in the market size calculation by AVC as they are too small and fragmented to gauge. We assume revenue from those new categories accounted for 10% of total demand before 2019, with growth of 80%/70%/30% in 2019/20E/21E on the back of the rapid development of live streaming and social driven ecommerce, which UBS Internet team estimates to grow at 226%/122%/61% in 2019/20E/21E. We think these could lead to additional volume growth of 3-10% in the next five years, which could more than offset the ASP reduction (-5% in 2020E and -2% thereafter) we expect caused by competition, by our calculation.
We estimate total home appliance market size of Rmb190bn in 2019 (including emerging categories) and a 7% revenue CAGR in 2019-24E mainly driven by volume growth (categories expansion and rising penetration).
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Figure 17: Breakdown of small appliance market size Figure 18: We expect small appliance industry to grow at growth, including emerging categories 7% CAGR in 2019-24E (incl. emerging categories)
Small appliances industry growth breakdown Small appliances market size (Rmb bn)
20% 16% 300 14% 13% 2014-2019 CAGR: 11% 267 15% 9% 2019-2024E CAGR: 7% 7% 8% 7% 250 10% 6% 6% 2% 5% 190 200 0% -5% 150 -10% -15% 100
2015 2016 2017 2018 2019 50 2020E 2021E 2022E 2023E 2024E ASP y/y growth - Additional volume growth (emerging categories) Volume growth (traditional categories) 2015 2016 2017 2018 2019 Total value y/y growth 2020E 2021E 2022E 2023E 2024E Source: AVC, Euromonitor, UBS-S estimates Source: AVC, Euromonitor, UBS-S estimates
Volume growth of major categories likely stable at 5% CAGR during 2019-24E
We expect demand for major small appliances categories to remain stable with a 5-year CAGR of 5% during 2019-24E, mainly driven by rising penetration. We estimate volume growth of -3% /11% for 2020E/21E amid COVID-19 impact. Figure 19: Small appliances demand model (major categories)
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E Total Demand Forecast Total Demand (volume, 1000) 274,816 302,581 315,417 331,065 366,555 356,906 397,572 416,943 436,715 456,869 YoY, % 6% 10% 4% 5% 11% -3% 11% 5% 5% 5% Replacement 135,376 154,869 169,886 201,559 241,372 218,120 256,758 274,387 292,574 311,327 YoY, % 15% 14% 10% 19% 20% -10% 18% 7% 7% 6% Replacement cycle 11.3 10.8 10.6 9.6 8.6 10.0 9.0 8.9 8.8 8.7 New demand 139,440 147,712 145,532 129,506 125,183 138,786 140,814 142,557 144,140 145,542 YoY, % -2% 6% -1% -11% -3% 11% 1% 1% 1% 1%
Ownership Totol ownership 1,670,079 1,807,934 1,944,353 2,064,738 2,181,201 2,310,821 2,442,041 2,574,652 2,708,543 2,843,573 Urban (10k) 1,018,748 1,120,919 1,224,942 1,321,432 1,417,781 1,518,348 1,621,381 1,726,593 1,833,821 1,942,878 Rural (10k) 651,331 687,015 719,410 743,306 763,420 792,473 820,661 848,059 874,722 900,695 Ownership per household 3.7 3.9 4.2 4.4 4.5 4.8 5.0 5.2 5.4 5.6 Ownership/urban families 4.0 4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Ownership/rural families 3.2 3.5 3.7 3.8 4.0 4.2 4.4 4.6 4.8 5.0 Population Total ('000) 452,778 459,552 466,787 473,844 480,189 486,379 492,404 498,247 503,910 509,386 YoY, % 1.6% 1.5% 1.6% 1.5% 1.3% 1.3% 1.2% 1.2% 1.1% 1.1% Urban family ('000) 251,810 261,426 271,139 280,568 289,096 297,471 305,679 313,687 321,487 329,068 YoY, % 3.4% 3.8% 3.7% 3.5% 3.0% 2.9% 2.8% 2.6% 2.5% 2.4% Rural family ('000) 200,968 198,126 195,648 193,276 191,093 188,908 186,725 184,561 182,423 180,319 YoY, % -0.6% -1.4% -1.3% -1.2% -1.1% -1.1% -1.2% -1.2% -1.2% -1.2% Source: AVC, Euromonitor, UBS-S estimates
Disruptive forces to ecommerce: live streaming and social network
UBS Internet team previously pointed out that live streaming ecommerce hit an inflection point in 2019, as the two short video platforms Douyin and Kuaishou pushed more into live streaming. We expect this evolving trend of ecommerce driven by live streaming and social networks to impact the small appliances industry most significantly among all categories, given high online penetration and product nature (standardised, low ticket value, and no installation required) that is well suited for promotion in this channel.
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Figure 20: Online penetration by category in China
Online penetration (2019) Toys and Games 72% Consumer Electronics 46% Small Appliances 46% Pet Care 43% Major Appliances 39% Apparel and Footwear 34% Beauty and Personal Care 30% Consumer Health 26% Tissue and Hygiene 22% Home Care 20% Packaged Food 11% Personal Accessories 9% Fresh Food 6% 0% 10% 20% 30% 40% 50% 60% 70% 80% Source: Euromonitor
Short video platforms, mainly Kuaishou and Douyin, are encouraging more ecommerce transactions by introducing features to enable shopping in their apps and promoting live streaming as a medium in addition to short video. Data tracked by UBS Evidence Lab on daily active users (DAUs) and time spent of all mobile apps highlighted the rising importance of Kuaishou and Douyin with share taken by the two platforms since the beginning of 2019. Mini program is another channel with rising importance, as it combines some social network (eg, WeChat) or content (news feed) use cases with better user experience, which improves conversion and user data collection.
Figure 21: Kuaishou & Douyin share of DAUs of all mobile Figure 22: Kuaishou & Douyin share of time spent of all apps in iOS and Android mobile apps in iOS and Android
40.0% 10.0%
35.0% 8.0% 30.0%
25.0% 6.0% 20.0% 15.0% 4.0% 10.0% 2.0% 5.0%
0.0% 0.0% Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Kuaishou Douyin Kuaishou Douyin Source: UBS Evidence Lab (> Access Dataset) Source: UBS Evidence Lab (> Access Dataset)
Live streaming: hitting an inflection point
UBS Internet team estimates China's live streaming penetration of ecommerce to reach 12.2% by 2022E and live streaming ecommerce GMV to reach Rmb2,171bn in 2022E, growing at a 71% CAGR over 2019-22E, more than triple China's online retail sales growth rate. We think the strong momentum of live streaming driven ecommerce is likely to change the competitive landscape of the small appliances industry.
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Figure 23: Live streaming ecommerce GMV as a % of total Figure 24: Live streaming ecommerce market size in China ecommerce GMV (Rmb bn)
14.0% 2500 565% 600% 12.2% 2171 12.0% 500% 10.3% 2000 10.0% 1545 400% 7.9% 1500 226% 300% 8.0% 961 1000 6.0% 122% 200% 4.3% 434 500 61% 41% 100% 4.0% 133 20 1.7% 2.0% 0 0% 0.3% 2017 2018 2019 2020E 2021E 2022E 0.0% Alibaba Kuaishou Bytedance 2017 2018 2019 2020E 2021E 2022E Others YoY Growth Source: iiMedia Research, UBS estimates Source: iiMedia Research, UBS estimates
Small appliances well-suited to live streaming ecommerce
We think products with the following traits are better suited for live streaming and Standardised, low ticket value, social driven ecommerce: standardised, low ticket value, small-sized and no small-sized and no installation installation required. Food and beverages, personal care products, and small required products are more suited appliances are the most popular categories purchased through live streaming in to live streaming purchases 2019. In contrast, jewellery (high ticket value) and mother and child products (customised) are less purchased in this channel, suggesting greater lack of trust during what could be seen as an impulse purchase.
Figure 25: Purchases through live streaming (2019)
Food & Drinks 39% Personal Care 34% Home appliances 32% Apparel 30% Fresh Fruits 27% Electronic Appliance 18% Beauty Care 18% Health Care 10% Sports & Outdoors 8% Mother & Child 5% Jewelry 2% Others 1%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Source: iiMedia Research, UBS-S Research
Among sub-categories, we think small kitchen appliance is best suited to social driven ecommerce, given its high online penetration by volume (74% vs 46% overall in 2019) and its characteristics that represent ones' lifestyle, especially Western kitchen appliances as consumers enjoy sharing their daily lives among online 'communities'. We think the de-centralisation of online traffic from those new platforms makes it critical for brands to focus on every consumer's feedback on a timely basis, which is quite different from traditional ecommerce marketing.
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Figure 26: Higher online penetration of small kitchen appliances (vs overall)
Online penetration for small kitchen appliances 90% 81% 80% 74% 66% 70% 60% 62% 60% 52% 48% 49% 50% 43% 37% 40% 36% 28% 30% 24% 19% 20% 10% 0% 2014 2015 2016 2017 2018 2019 2020F by value by volume Note: includes 10 major kitchen appliances categories. Source: AVC
Customer-oriented model is a solution to leverage new traffic
Given the evolving ecommerce platform, we see a rising importance of consumer feedback for brands. This requires brands to respond faster to market changes (ie, capture new demand, fix existing product problems). For instance, the ecosystems of content-sharing platforms have enabled brands to build closer connections with consumers. Under this model, brands, retailers and KOLs create content to attract consumers, who in return provide their feedbacks on the products. Their feedback influences how the KOLs recommend products later. Therefore, we think brands with better operation abilities on social/content platforms are more likely to win consumers.
Figure 27: Ecosystem for content-sharing platforms
Source: UBS-S Research
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Case study: Xinbao
Xinbao's domestic sales growth accelerated to over 50% in 2019 (vs 9% 5-year CAGR during 2013-18) as it benefits from the popularity of live streaming and social driven ecommerce, per the company. According to the company, Xinbao's rapid sales growth in 2019 was mainly due to the contribution of the Morphy Richards (Morphy) brand, with sales of Rmb650m (+350% YoY) in 2019. Two key products were launched under Morphy: multifunction pot and portable juice cup. According to the company, these have become its best-selling items after being successfully promoted on social/content platforms such as Little Red Book (Xiaohongshu). In addition, most of Xinbao's products are focused on small kitchen appliance.
Figure 28: Xinbao domestic sales growth reached 50% in Figure 29: … in line with the popularity of live streaming 2019, versus 9% 5-year CAGR during 2013-18… (Kuaishou & Douyin share of DAUs of all mobile apps in iOS and Android)
Xinbao domestic sales vs YoY growth 40.0%
1,800 60% 35.0% 1,600 50% 30.0% 1,400 40% 1,200 30% 25.0% 1,000 20% 20.0% 800 10% 15.0% 600 0% 10.0% 400 -10% 200 -20% 5.0% - -30% 0.0% 2013 2014 2015 2016 2017 2018 2019 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Domestic sales (RMB mn) YoY growth Kuaishou Douyin
Source: Company data Source: UBS Evidence Lab (> Access Dataset)
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China Small Appliances Sector UBS Research
Sector Q3 PIVOTAL QUESTIONS return
Q: Which category is best positioned?
UBS VIEW We are bullish on the growth prospects of the home appliances segment, fuelled by the vacuums sub-category, mainly due to: 1) 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.
EVIDENCE . On average, every 100 households in China own only 12 vacuum cleaners, much lower than the numbers in developed countries (150 in the US, 95 in Japan and 90 in Korea).
. Volume share of the top five vacuum brands in China was c.50% in 2019, lower than that of other major categories (i.e., 100% for soymilk machines, 89% for rice cookers and 96% for pressure cookers in the offline channel, according to AVC) and other countries globally (82% in the US, 70% in Japan and 85% in Korea).
. Our channel checks on small appliances brands' Tmall flagship stores suggest most brands are priced between Rmb149 and Rmb899, and few are priced over Rmb1,500. Dyson is the most expensive vacuum brand, with prices between Rmb2,190 and Rmb5,490, and few competitors in its price range.
WHAT'S PRICED IN? We think investors will likely become more interested in the home environment appliances category. This is potentially triggered by its rising popularity in China as people more spend time at home amid COVID-19.
Home environment appliances segment could be the next bright spot, led by the vacuums sub-category Among major small appliances categories, home environment appliances (including water purifier, vacuum cleaner and air purifier) have registered the highest sales growth (15% CAGR in 2015-19, per AVC). We think the home environment appliance category could become the next bright spot, mostly as it benefits from Chinese consumers' rising health awareness post COVID-19 and as penetration is low. Among home environment appliances, we believe vacuum cleaner could be the most promising sub-category, given its relatively large market size (c.Rmb20bn, and ranked No.2 among all sub-categories in 2019), rapid sales growth (27% CAGR in 2015-19, ranks No.2) and high ticket value (Rmb799, No.5 in 2019).
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Figure 30: Market size of major small appliances categories (2019) and sales CAGR (2015-19)
35,000 50% 30,000 40% 25,000 30% 20% 20,000 10% 15,000 0% 10,000 -10% 5,000 -20% - -30% Fan Juicer Heater Kettles Vacuums Air Purifier cooker Rice cooker Microwaves Electric ovens Water Purifier Water Food processor Electric Pressure Electric Water Dispenser Water purification Induction Cooker Soy Milk Machine Kitchen water heater
Market size (RMB mn, 2019) Sales CAGR (2015-19) with Dispenser Water
Note: light coloured are classified as home environment appliances sub-categories. Source: AVC
Figure 31: ASP of major small appliances categories
ASP (Rmb, 2019) Electric ovens Water Purifier Water Dispenser with purification Air Purifier Vacuums Microwaves Juicer Water Dispenser Soy Milk Machine Kitchen water heater Electric Pressure cooker Rice cooker Food processor Heater Induction Cooker Fan Kettles
- 1,000 2,000 3,000 4,000
Source: AVC
A rapidly growing but underpenetrated category in China
Vacuum cleaner is a rapid-growing category, as market size grew at a 27% CAGR during 2015-19. We are positive on the growth prospects for vacuum cleaners in China, given: (1) current low penetration in China (vs global). On average, only 12 out of 100 households in China own a vacuum, much lower than the numbers in developed countries (150 in the US, 95 in Japan and 90 in Korea).
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Figure 32: Vacuum is a rapid-growing category… Figure 33: …but still underpenetrated
China's vacuum cleaner market size (Rmb m) Number of vacuums per 100 household
25,000 160 150 140 20,000 120 105 95 100 90 15,000 80 10,000 60 40 5,000 20 12
- 0 2015 2016 2017 2018 2019 China US UK Japan S. Korea
Source: AVC Source: Frost & Sullivan Report
2) Relatively low concentration ratio. Volume share of the top five vacuum brands (CR5) in China is c.50%, lower than that of other major categories (eg, 100% for soymilk machine, 89% for rice cooker, and 96% for pressure cooker in offline channel, per AVC 2019) and other countries globally (82% in US, 70% in Japan and 85% in Korea, per Euromonitor 2019). 3) Potentially rising demand post COVID-19, given consumers' rising health awareness.
Figure 34: Vacuum CR5 comparison Figure 35: CR5 of major categories in China
Vacuum CR5 by volume (2019) CR5 (2019)
90% 85% 100% 82% 96% 96% 100% 94% 80% 89% 70% 90% 70% 62% 80% 70% 60% 70% 50% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% Soymilk machine Rice cooker Pressure cooker 0% China US UK Japan S. Korea Offline Online Source: Euromonitor Source: AVC
Opportunities lie in the mid- to high-end market
We think the low-end vacuum market is quite competitive. Our channel check on brands' Tmall flagship stores suggests that most vacuum cleaner brands are priced between Rmb149 and Rmb899, but very few are priced over Rmb1,500. Dyson is the most high-end vacuum brand, priced largely from Rmb2,190 to Rmb5,490, without many competitors in its price range.
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Figure 36: China vacuums brand share by volume (2019)
China vacuum brand share (2019) Ecovacs Robotics 14%
Midea 13% Others 51%
Dyson 8%
Philips Puppy Electronic 8% 7% Source: Euromonitor
Figure 37: Pricing ranges of major vacuums brands
Rmb/unit 6,000
5,000
4,000
3,000
2,000
1,000
0 Shark (by Ecovacs Midea Dyson Philips Puppy Xiaomi Deerma Supor Others Joyoung) Electronic
Note: As of 1 June 2020. Robotic vacuum only for Ecovacs Robotics brand. Source: Tmall flagship stores
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China Small Appliances Sector UBS Research
Sector priced in WHAT'S PRICED IN? return
Valuations: white goods vs. small appliances sector
The global small appliances names are largely trading at 25-30x 2021E PE, much higher than white goods’ 10-15x. We think this is mainly due to two reasons:
1) Industry growth. We forecast sales in the small appliances market to grow by high single-digit in the next five years (low teens in the past five years). Meanwhile, white goods probably had only low single-digit sales growth in the past five years and we believe its prospects could be even lower in the next five years given its high penetration rate.
2) Competitive landscape. The top three small appliances companies had a combined volume share of only c.40% in 2019, suggesting substantial growth potential for all small appliances companies, in our view. In contrast, the top three white goods companies have combined volume shares of c.70% in each sub-sectors in 2019. We think the white goods industry’s volume growth will likely be limited, thus curbing the growth potential of leading companies.
Figure 38: Residual income model (current) Figure 39: Residual income model (a year ago)
100% 100% 9% 10% 4% 17% 23% 11% 34% 80% 38% 80% 26% 47% 13% 60% 61% 13% 60% 11% 10% 40% 79% 79% 40% 53% 65% 64% 20% 65% 51% 43% 20% 0% -26% 0% -20% JS Global Midea Joyoung Supor JS Global Midea Joyoung Supor
Implied long-term growth Capitalised short-term growth Implied long-term growth Capitalised short-term growth Capitalised Current Earnings Capitalised Current Earnings Note: As of 28 July 2020. Note: As of 28 June 2019. Data for JS Global is from 28 February 2020 given it is Source: UBS estimates newly listed. Source: UBS estimates
JS Global Lifestyle: We think synergies from its two business segments could be skewed towards SharkNinja, potentially leading to a 2020-22E EBIT CAGR of 28% for JS Global versus Joyoung’s 22%. We think its current valuation of 18x 2021E PE with a 35% earnings CAGR in 2020-22E is more attractive than Joyoung’s (28x/18%, UBS-Se) and global peers' average (23x/20%). We think the stock is overlooked, as SharkNinja’s limited financial disclosure of segment makes it hard for investors to evaluate its performance. This was also reflected in its implied long- term growth of 9%, which is much lower than peers' (Midea 23%, Joyoung 38%, and Supor 47%). We expect investors to understand it better as they look into this name for a longer period. In addition, we also note its implied long-term growth has grown from -26% half a year ago when it just went listed, suggesting investors have turned incrementally more positive towards this name.
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We think the stock is overlooked, as SharkNinja’s limited financial disclosures make it hard for investors to evaluate its performance. We expect sentiment to improve as investors learn more about SkarkNinja.
Joyoung: Given its recent share price increase, we believe the market has largely recognised its strengthened leading position backed by new product development. We think its improving fundamentals have also been reflected in its rising implied long-term growth (38% versus 4%) a year ago. However, we flag potential earnings downside risk from consistent industry-wide price competition and an increasing number of small online rivals. Trading at 28x 2021E PE with 18% 2020- 22E EPS CAGR (vs domestic and global peers' 31x/16% and 23x/20%), Joyoung's valuation looks reasonable to us. We think any further re-rating could be capped by potential margin headwinds, while its high payout ratio (c.95% vs peer avg. 50%) and ongoing 3-year stock incentive plan suggest limited downside risk.
Supor: We believe Supor's conservative omni-channel strategy amid industry-wide channel reform might be the cause of its continuous market-share loss since 2019, and may lead to potential underperformance versus peers in 2020-21. Trading at 33x 2021E PE with a 12% earnings CAGR in 2020E-22E (versus domestic peers' 28x 2021E PE/18% CAGR and global peers' 25x 2021E PE/25% CAGR), we think the stock is overvalued. Its implied long-term growth has increased to 47% (versus 34% a year ago), the highest among peers (JS Global, Midea and Joyoung), which looks unjustified to us given its lowest earnings growth in 2020-22E.
Figure 40: JS Global’s PE band Figure 41: Joyoung’s PE band JS Global Joyoung 45 x 28 x +1 SD: 22.7x +1SD: 22.7x 40 x 26 x Mean: 19.9x Mean: 18.3x -1 SD: 17.8x 35 x -1SD: 13.8x 24 x 30 x 22 x 25 x 20 x 20 x 18 x 15 x 16 x 10 x 5 x 14 x 0 x 12 x 10 x Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18 Nov-19 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 May-13 May-14 May-15 May-16 May-17 May-18 May-19 May-20 12-month forward P/E Mean +1 SD -1 SD 12-month forward P/E Mean +1 SD -1 SD
Source: Wind, UBS estimates Source: Wind, UBS estimates Figure 42: Supor’s PE band 40 x +1 SD: 26.0x Supor 35 x Mean: 19.4x -1 SD: 13.0x 30 x 25 x 20 x 15 x 10 x 5 x 0 x Feb-20 Feb-19 Feb-18 Feb-17 Feb-16 Feb-15 Feb-14 Nov-19 Nov-18 Nov-17 Nov-16 Nov-15 Nov-14 Nov-13 Aug-19 Aug-18 Aug-17 Aug-16 Aug-15 Aug-14 Aug-13 May-20 May-19 May-18 May-17 May-16 May-15 May-14 May-13 12-month forward P/E Mean +1 SD -1 SD
Source: Wind, UBS-S estimates
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Figure 43: Valuation
Appliance segment
Net dividend EPS Current Mkt cap PE (x) EV/EBITDA (x) P/BV (x) yield (%) ROE (%) CAGR PEG Company name price (LCY) (US$, m) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 20-22E 2020E 2021E China - White goods
Midea Group 71.75 67,354 20.2 17.1 12.7 10.0 4.3 3.8 2% 3% 23% 23% 15% 1.3 1.1 Gree 56.91 49,077 14.1 11.7 7.5 5.8 2.7 2.4 4% 4% 21% 22% 18% 0.8 0.7 Hisense Home Appliance 10.98 1,918 10.6 9.1 3.0 2.6 1.4 1.3 3% 4% 14% 15% 13% 0.8 0.7 Average 15.0 12.7 7.7 6.1 2.8 2.5 3% 4% 19% 20% 16% 1.0 0.8
China - Kitchen appliances
Robam Appliances 38.33 5,212 22.2 19.6 17.7 15.0 4.5 4.0 2% 3% 22% 22% 11% 2.0 1.8 Vatti 10.38 1,292 12.0 10.5 8.8 7.7 2.4 2.1 3% 3% 21% 20% 13% 0.9 0.8 Average 17.1 15.1 13.2 11.4 3.5 3.0 3% 3% 22% 21% 12% 1.5 1.3
China - Small appliances
Supor 84.81 9,980 36.7 33.3 29.1 26.0 9.4 8.7 2% 2% 27% 27% 12% 3.1 2.8 Joyoung 39.08 4,296 32.9 27.5 28.7 23.2 7.6 7.2 2% 3% 24% 27% 18% 1.8 1.5 Xinbao 49.76 5,710 42.6 34.8 27.7 23.4 8.0 7.0 1% 1% 19% 20% 22% 1.9 1.6 Bears 151.10 3,375 56.4 44.8 41.1 32.6 11.6 9.6 1% 1% 21% 22% 25% 2.3 1.8 Flyco 61.07 3,809 37.7 34.6 26.9 24.3 9.0 8.2 2% 2% 24% 24% 9% 4.1 3.7 Kingclean 26.75 1,536 20.9 18.3 14.0 12.1 3.0 2.7 1% 1% 14% 15% 13% 1.6 1.4 Gongniu 151.42 13,020 36.0 30.2 28.6 23.8 10.5 8.4 1% 2% 31% 29% 19% 1.9 1.6 Opple 30.00 3,247 24.5 21.4 20.9 18.4 4.0 3.6 1% 2% 17% 17% 13% 1.9 1.7 Average 36.0 30.6 27.1 23.0 7.9 6.9 2% 2% 22% 22% 16% 2.3 2.0
Global appliance peers
JS Global 7.95 3,501 24.9 18.3 11.6 9.6 2.8 2.5 2% 3% 11% 15% 35% 0.7 0.5 Daikin 18450.00 51,640 37.8 30.2 12.7 10.0 3.6 3.4 1% 1% 10% 12% 21% 1.8 1.4 Whirlpool 163.01 10,155 12.6 10.4 7.0 6.1 3.0 2.7 3% 3% 21% 28% 18% 0.7 0.6 Electrolux 164.15 5,826 23.4 13.0 7.3 5.3 2.1 1.9 3% 4% 6% 16% 49% 0.5 0.3 SEB 142.20 8,434 24.6 16.9 14.0 11.0 2.8 2.5 1% 2% 13% 15% 26% 0.9 0.6 RATIONAL 512.50 6,870 97.6 54.2 53.1 32.7 11.2 10.1 1% 2% 12% 20% 58% 1.7 0.9 Arcelik 23.08 2,233 13.4 12.4 6.1 5.4 1.5 1.4 2% 3% 11% 11% 13% 1.0 0.9 De'Longhi 26.00 4,589 25.0 23.8 11.8 10.2 3.0 2.8 1% 2% 13% 13% 6% 3.9 3.7 Zojirushi 1417.00 982 29.0 22.3 NA NA 1.3 1.3 2% 2% 5% 6% 22% 1.3 1.0 iRobot 73.60 2,052 32.9 40.0 9.5 10.1 2.9 2.7 0% 0% 11% 10% 12% 2.7 3.3 Average 26.8 23.4 10.9 9.4 2.6 2.4 1% 2% 10% 12% 20% 1.8 1.6
Note: Data as of 31 July 2020. Excludes extreme numbers. Source: Wind, Thomson Reuters, UBS-S estimates (Joyoung and Supor), UBS estimates (JS Global and Midea)
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Valuation Method and Risk Statement We believe the main risks facing China's small appliances sector include: China's economic downturn leading to weak consumption; price competition; and raw material price increases eroding the industry’s profitability.
JS Global: Our price target is based on a DCF methodology. Major risks include: (1) Global markets for its products are highly competitive and subject to rapid technological changes, and it may not be able to compete effectively in relevant markets. (2) any trade or import protection policies may materially and adversely affect its business. (3) Its global operations are subject to various risks, including increased competition, uncertain enforcement of its intellectual property rights, more complex distribution logistics, and the complexity of compliance with foreign laws and regulations. (4) raw material cost inflation.
Joyoung: Our price target is based on a DCF methodology. Downside risks include: 1) rising price competition; 2) raw material cost inflation; and 3) unsuccessful R&D on new products. Upside risks include: 1) reduced price competition; 2) sales of upgraded food processors beat expectation; and 3) lower raw material costs
Supor: Our price target is based on DCF methodology. Downside risks include: 1) rising price competition; 2) raw material costs inflation; and 3) unsuccessful R&D on new products. Upside risks include: 1) reduced price competition; 2) sales of new categories beating expectations; and 3) reduced raw material costs.
Midea: Our price target is based on an SOTP methodology. We believe the main risks facing the company include: 1) regulation in the property market leading to lower demand for home appliances; 2) rising raw-material prices and costs; 3) FX losses triggered by swings in the renminbi exchange rate; and 4) the global robot market growing slower.
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Required Disclosures This report has been prepared by UBS Securities Asia Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; certain additional disclosures concerning UBS research recommendations; and terms and conditions for certain third party data used in research report, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 03 August 2020 09:20 AM GMT. UBS has designated certain Research department members as Derivatives Research Analysts where those department members publish research principally on the analysis of the price or market for a derivative, and provide information reasonably sufficient upon which to base a decision to enter into a derivatives transaction. Where Derivatives Research Analysts co-author research reports with Equity Research Analysts or Economists, the Derivatives Research Analyst is responsible for the derivatives investment views, forecasts, and/or recommendations. Analyst Certification:Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS Investment Research: Global Equity Rating Definitions
12-Month Rating Definition Coverage1 IB Services2 Buy FSR is > 6% above the MRA. 49% 32% Neutral FSR is between -6% and 6% of the MRA. 39% 30% Sell FSR is > 6% below the MRA. 13% 20%
Short-Term Rating Definition Coverage3 IB Services4 Stock price expected to rise within three months from the time <1% <1% Buy the rating was assigned because of a specific catalyst or event. Stock price expected to fall within three months from the time <1% <1% Sell the rating was assigned because of a specific catalyst or event.
Source: UBS. Rating allocations are as of 30 June 2020. 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. KEY DEFINITIONS:Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. In some cases, this yield may be based on accrued dividends. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months.
Initiation of Coverage: China Small Appliances Sector 3 August 2020 28
EXCEPTIONS AND SPECIAL CASES:UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS AG Hong Kong Branch: Christine Peng, CFA. UBS Securities Co. Limited: Rennie Pan. Company Disclosures Company Name Reuters 12-month rating Short-term rating Price Price date
Joyoung 002242.SZ Not Rated N/A Rmb39.08 31 Jul 2020 JS Global Lifestyle 1691.HK Not Rated N/A HK$7.95 31 Jul 2020 Midea Group 000333.SZ Buy N/A Rmb71.75 31 Jul 2020 Zhejiang Supor 002032.SZ Not Rated N/A Rmb84.81 31 Jul 2020
Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research. Joyoung (Rmb) Price Target (Rmb) Stock Price (Rmb) 40.0 30.0 20.0 10.0 0 .0 7 8 9 7 8 8 9 9 0 0 8 9 9 9 0 0 7 7 8 8 1 1 1 1 1 1 2 2 1 1 1 1 - 1 1 1 - 1 1 1 - 2 2 ------l v l v l l v r r r n y n y y n y p p p u o a u o a u o a u a a a a a a a J e J e J e J J J J - - - - S N - S N - S N - M M M - - M - - M M - - M 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 1 1 1 1 1 0 1 0 1 0 1 0 0 1 1 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 Buy Neutral No Rating
Date Stock Price (Rmb) Price Target (Rmb) Rating 2017-04-28 19.43 22.71 Buy 2017-09-05 19.91 22.57 Buy 2017-11-18 18.19 20.01 Neutral 2018-04-23 16.76 18.53 Neutral 2018-12-06 14.68 - No Rating Source: UBS; as of 31 Jul 2020
Initiation of Coverage: China Small Appliances Sector 3 August 2020 29
JS Global Lifestyle (HK$) Price Target (HK$) Stock Price (HK$) 10.0 8 .0 6 .0 4 .0 2 .0 0 .0 7 7 8 8 9 9 0 8 9 0 7 7 8 8 8 9 9 9 0 0 1 1 1 1 1 1 2 1 1 2 1 1 - 1 1 1 - 1 1 1 - 2 2 ------l v l v l v l r r r y n y n y n y p p p u o a u o a u o a u a a a a a a a J e J e J e J J J J - - - - S N - S N - S N - M M M M - - M - - M - - M 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 1 1 1 1 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 No Rating
Date Stock Price (HK$) Price Target (HK$) Rating 2017-04-28 NaN - No Rating Source: UBS; as of 31 Jul 2020
Midea Group (Rmb) Price Target (Rmb) Stock Price (Rmb) 80.0
60.0
40.0
20.0
0 .0 7 8 9 7 0 8 9 7 8 8 7 9 9 8 8 0 0 9 9 0 1 1 1 1 2 1 1 1 1 1 1 1 1 1 1 2 2 1 1 2 ------l l l l r r r v v v y y y y p n p p n n u u u a u a a a a o a o a o e a e J e a J a J J J - J - J - - S S S N M N M - N M - - M M - M - M - 1 1 1 - - 1 ------1 1 1 1 1 1 0 0 0 1 1 0 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Buy No Rating
Date Stock Price (Rmb) Price Target (Rmb) Rating 2017-04-28 33.66 39.59 Buy 2017-06-20 40.88 45.26 Buy 2017-08-31 41.0 48.6 Buy 2017-10-28 50.72 58.2 Buy 2017-12-06 50.95 61.11 Buy 2018-01-26 62.0 67.19 Buy 2018-03-08 59.17 - No Rating 2018-03-09 59.91 67.19 Buy 2018-04-02 52.84 66.66 Buy 2018-08-07 44.66 60.1 Buy 2018-09-04 42.28 56.48 Buy 2018-10-31 37.04 51.0 Buy 2019-04-29 51.31 62.99 Buy 2020-05-01 53.75 67.77 Buy Source: UBS; as of 31 Jul 2020
Initiation of Coverage: China Small Appliances Sector 3 August 2020 30
Zhejiang Supor (Rmb) Price Target (Rmb) Stock Price (Rmb) 1 00 80 60 40 20 0 8 9 7 8 9 9 0 0 8 7 8 8 8 9 9 9 0 0 7 7 1 1 1 1 1 1 2 2 1 1 1 1 - 1 1 1 - 2 2 1 - 1 1 ------l v l v l v l r r r y n y n y n y p p p u o a u o a u a o u a a a a a a a J e J e J J e J J J - - - - S N - S N - - N S M M M M - - M - - M - M - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 1 1 1 1 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 Buy Neutral No Rating
Date Stock Price (Rmb) Price Target (Rmb) Rating 2017-04-28 34.22 40.75 Buy 2017-08-31 37.42 42.78 Buy 2017-11-28 42.0 47.01 Buy 2018-04-02 43.0 51.11 Buy 2018-06-14 54.99 - No Rating 2018-06-16 53.28 56.75 Neutral 2018-12-18 53.08 - No Rating Source: UBS; as of 31 Jul 2020
Initiation of Coverage: China Small Appliances Sector 3 August 2020 31
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Initiation of Coverage: China Small Appliances Sector 3 August 2020 33
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