According to the report released by Oriental Securities, since the second half of 2023, with the gradual decline of the prices of versatile floor cleaning machines to below 4,000 yuan, the domestic market sales growth rate has gradually turned positive, and the logic of exchanging price for quantity has gradually been realized. There is still ample room for improvement in the penetration rate of China's floor cleaning industry in the medium-to-long term. Lowering prices is an important way to popularize products while not affecting their practicality. In this respect, product prices, driven by the standardization of cost reduction and technology, may make floor cleaning machines available to more Chinese families and drive the long-term stable development of the industry. Therefore, the floor cleaning industry is a growing industry with long-term investment value, and it is recommended to invest in leading enterprises such as Beijing Roborock Technology (688169.SH) and Ecovacs Robotics (603486.SH).

Orient Securities' main points are as follows:

On April 12, 2024, the State Council issued the "Several Opinions on Strengthening Supervision, Preventing Risk, and Promoting the High-quality Development of the Capital Markets" (hereinafter referred to as the new "National Ninth Regulations"). This is the third "National Ninth Regulation" after 2004 and 2014, and it has far-reaching implications for the development of capital markets. The new "National Ninth Regulations" clearly point out that we need to vigorously promote the entry of medium-to-long term funds into the market, and strengthen the long-term investment power. Oriental Securities believes that an industry with long-term investment logic is one of the key factors supporting long-term investment. The floor cleaning industry, which is still in the fast-growing stage of penetration rate, has particularly prominent long-term investment attributes.

The growth rate of the floor cleaning industry is picking up, and the market concentration is relatively high.

Since 2016, driven by technological upgrades and product iterations, China's floor cleaning robot industry has entered a period of rapid development. According to data from AVC Cloud, from 2016 to 2023, the composite sales growth rate and volume growth rate of China's floor cleaning robots across all channels were 20% and 8%, respectively. In terms of stages, from 2016 to 2020, the industry's scale growth was mainly driven by quantity increase. After the self-cleaning and versatile base station products were launched in 2021-2022, the rise in product prices became the core driving force for the expansion of the industry. Since the second half of 2023, with the gradual decline of versatile base station product prices below 4,000 yuan and the outstanding cost performance of new products, the sales growth rate of the industry has gradually turned positive. From the perspective of market structure, the concentration of the floor cleaning industry is relatively high. The online market share of the top five brands adds up to more than 80% (in terms of sales volume).

In the early stage, the high-priced new products drove the industry's volume expansion, while the contraction of the mid-to-low-end market led to a decrease in sales volume in 2021-2022.

From 2016 to 2020, the core driving force behind the growth in sales volume of the industry was the core technology upgrades and basic function improvements. Head brands in the industry driven by high-priced new products in navigation, cleaning, obstacle avoidance, and other areas have stimulated product volume. Since 2021, self-cleaning and versatile base stations products above 3,000 yuan have surged. However, sales of mid-to-low-end products priced below 2,000 yuan have rapidly declined, leading to an overall negative sales growth rate. Oriental Securities believes that the inadequate practicality of the products and weak brand momentum in the low-end market are important reasons for the sales decline in the floor cleaning machine low-end market; on the one hand, the gap between low-end products and versatile/self-cleaning products has reached a certain threshold in terms of practical experience, and on the other hand, small and medium brands lack new products in the low-end market, as well as sufficient consumer education.

Oriental Securities believes that product low practicality and weakness in low-end market products and brand momentum are the important reasons for the contraction of the floor cleaning machine low-end market. On the one hand, the gap between low-end products and versatile/self-cleaning products has reached a certain threshold in terms of practical experience, and on the other hand, small and medium brands lack new products in the low-end market, as well as sufficient consumer education.

The turning point in sales volume has appeared, and versatile base station products with excellent cost performance can accelerate the increase in the penetration rate of floor cleaning machines.

Since the second half of 2023, with the gradual decline of versatile floor cleaning machine product prices below 4,000 yuan, products with excellent cost performance have driven the industry sales growth rate to gradually rebound, and the logic of exchanging price for quantity has initially been realized. Looking forward to the future, according to Oriental Securities' estimate, the penetration rate of floor cleaning machines in Chinese urban families is about 11% in 2023, indicating there is still ample room for development. The relatively high prices of floor cleaning machines are still a key factor limiting their penetration rate. Oriental Securities believes that the main functions of floor cleaning machines have been relatively perfected and reducing costs to drive product price declines while not affecting their practicality is the core driving force behind the current increase in penetration rate of floor cleaning machines. Under a neutral hypothesis, if the industry's penetration rate reaches 21% by 2030, the compound annual growth rate (CAGR) of China's floor cleaning machine sales volume in the next seven years may reach 8%.

The risks include the risk that product cost reduction is below expectations; the risk of weakening terminal consumer demand; the risk of increased industry competition; and the risk that changes in assumptions affect results.

Risk Warning: Risks of product cost reduction falling short of expectations; risks of weakening end-consumer demand; risks of intensified industry competition; risks of assumptions affecting the calculated results.