Core views

The company released its 2024 three-quarter report, and the revenue side bucked the trend and remained basically flat. Domestic sales have been dragged down by the decline in industry sentiment, and the export sales side has maintained a good growth rate. Looking ahead to Q4, the effect of the national supplement policy is obvious, and online sales have rebounded markedly. Currently, Hisense's overall profitability still has a lot of room compared to leading companies. After the equity incentive, the company is in a period of releasing operating dividends. The differentiation and high-end strategy is reaping good results, and I am optimistic about the long-term sustainability of the company's performance growth in the context of improved governance.

occurrences

On October 30, 2024, Hisense Home Appliances released its 2024 three-quarter report.

In the first three quarters of 2024, the company achieved operating income of 70.579 billion yuan, up 8.75% year on year; net profit to mother of 2.793 billion yuan, up 15.13% year on year; deducted non-net profit of 2.289 billion yuan, up 10.99% year on year.

24Q3 achieved operating income of 21.937 billion yuan, a year-on-year decrease of 0.08%; net profit to mother was 0.777 billion yuan, a year-on-year decrease of 16.29%; after deducting non-net profit of 0.586 billion yuan, a year-on-year decrease of 26.67%.

Brief review

1. Revenue side: Export sales continued to be strong, domestic sales were temporarily under pressure, and domestic sales rebounded significantly after the national supplement. Demand in the industry was weak in the third quarter, and price competition intensified in the context of inventory accumulation. The company's operations were dragged down accordingly. The company's domestic sales are expected to decline in Q3. In terms of structure, due to the low season, the overall performance was weaker than freezing. The CCAC channel side was affected by the decline in real estate completion and delays in public construction commencement, and the decline was higher than that of White Power as a whole. Since entering the national compensation cycle, the boosting effect of the policy has been remarkable. Hisense's online sales have rebounded rapidly, and the domestic sales side is expected to show good growth in Q4.

On the overseas side, overall demand from emerging markets has been maintained, and demand from developed markets in Europe and the US is gradually recovering. The company's Q3 export sales side is expected to achieve good double-digit growth.

2. Profit side: Prices of raw materials rose, and profitability declined somewhat. In Q3, the company achieved a gross profit margin of 20.76% in a single quarter, a year-on-year decrease of 2.45 pcts. The decline in gross margin is due to ① the rise in the prices of bulk raw materials such as copper and aluminum in the first half of the year, and the company's gross margin declined significantly; ② the domestic and foreign sales structure. Although revenue on the export side increased markedly, the gross margin of products in the overseas market was low, and the price center of products on the domestic sales side moved downward. The rise on the export side could not hedge against the downward pressure on profits caused by weak domestic sales.

The overall cost rate was optimized and controlled, and profitability declined somewhat. The 24Q3 company achieved a net interest rate of 5.18, a year-on-year decrease of 1.54 pcts. Sales expense ratio 10.0% (-1.25pct), management expense ratio 2.64% (+0.14pct), R&D expense ratio 3.57% (+0.68%), financial expense ratio 0.42% (+0.52pct).

3. The results of governance improvements are obvious. We are optimistic about the sustainability of the company's subsequent performance growth. We believe that the changes in Hisense's governance are only the beginning of business changes; they will not go through the improvement cycle in about a year; they will be a longer cycle of business boosting and share growth. Let's look at them in three sections:

Central air conditioning business: Industry growth continues to emerge, and Hisense Hitachi also has room for growth. The company is deeply involved in the central air service business and has maintained a leading position in the industry. In particular, it has remarkable advantages in multi-line business, ranks first in the domestic market, and has strong certainty in long-term business growth. At the same time, there is still room for expansion in three areas:

Category side: Improving the coverage of multiple categories, such as unit machines, heat pumps, and water machines, which have great development prospects. Multiple online advantage channels and service capabilities can be reused to the Xintuo category. Currently, new business lines account for a high share of CCAC's revenue side, but the overall growth rate is high; Regional side: developing overseas markets, the company mainly relies on the Hisense brand to expand overseas. Currently, the overseas share of CCTV is growing rapidly since this year; Channel side: The company started developing commercial space in 2021, and the current share of engineering channels is still low, and there is still a large share of engineering channels in the future. Space for development.

On the market side, the central air conditioning market is growing steadily, reaching 100 billion dollars in recent years. Although the relationship between CCAC and real estate is high, and short-term downward pressure on real estate has had an impact on the CCAC market, the recent continued easing of real estate policies and strong infrastructure policies are expected to inject momentum into the future market. In the long run, the penetration rate of central air conditioning is still low, and the increase in consumption upgrades and hardcover support rates will help central air conditioning maintain a good growth rate.

Traditional home appliance business: Differentiated and high-end strategies to increase share. Aiming at the cold washing industry entering the inventory era, the company adopted a competitive strategy of high-end refrigerators and differentiated washing machines to improve competitiveness and share. In terms of going overseas, the company is actively developing its own brand+overseas mergers and acquisitions+sports marketing. The export scale of refrigerators and washing machines continues to expand, and its market share is steadily increasing. In terms of air conditioning, it is expected to seek growth in the lumbar market and channel expansion in the future. The company currently has accumulated a lot of high-end products and low-end products, but there is still a shortage of waist products, and at the same time, there is still a big gap in channel layout compared to leading companies.

The company will increase the number of specialty stores through an effective network expansion strategy and upgrade the specialty store product line to a more complete package to achieve a gradual improvement in single-store efficiency.

Automotive thermal management business: Acquired Nippon Sanden and entered the new energy circuit. Compared with traditional fuel vehicles, thermal management systems for new energy vehicles require higher functionality and fineness, so they have higher bicycle value and technical barriers. Currently, the NEV market is expected to continue to grow at a high rate, and industry sentiment will also spill over to the upstream supply chain, driving the thermal management industry to flourish. In 2021, the company acquired Japan's Sanden, the world's leading manufacturer of thermal management for established automobiles, and entered the thermal management circuit. Relying on Sanden's global market and high-quality customer resources, combined with Hisense's rich experience in mergers and acquisitions, Sanden is expected to gradually improve its business dilemma, achieve collaborative development, and share the dividends of the new energy thermal management circuit.

Investment advice: Hisense's home appliance product matrix covers a comprehensive range, and the prospects for each growth curve are clear. The introduction of equity incentives means that corporate governance has entered a new stage, which is expected to lead to valuation repair and continued growth in subsequent performance. We expect the company's revenue to be 94.4/103.4/112.8 billion in 2024-2026, with growth rates of 10.26%, 9.56%, and 9.12% respectively; net profit to mother will be 3.451/3.955/4.513 billion yuan, respectively, with growth rates of 21.62%, 14.62%, and 14.11%, corresponding PE of 11.3X, 9.8X, and 8.6X, maintaining the “buy” rating.

Risk warning: 1) Macroeconomic growth falls short of expectations: Household appliances are durable consumer goods and are closely related to residents' income expectations. If macroeconomic growth slows down, it may have a big impact on the company's product sales.

2) Increased market competition: In a weak market environment, industry competition is more intense, and companies risk losing share and low price competition dragging down profits.

3) Risk of fluctuations in raw material prices: The company's raw material costs account for relatively high, and corporate profits are highly sensitive to fluctuations in raw material prices. Bulk raw materials account for more than 85% of operating costs in the cost structure of home appliance companies. If bulk prices rise again, the company's profitability will weaken.

4) Risk of fluctuations in the real estate market: The company's main business is highly correlated with the real estate market. Since 2022, the growth rate of residential completion and sales has declined, and the scale of hardcover housing has decreased. If the real estate market continues to be sluggish, the company's revenue will grow or decline in the future.