Since reaching a historic high on October 8, 2024, the stock price of the major appliance giant HAIER SMARTHOME has entered a continuous correction, with a cumulative decline of over 20%, showing a significant weakening compared to the stock prices of its contemporaries, Midea and Gree.

In contrast to the fluctuating downward trend of HAIER SMARTHOME's stock price, the latter two giants regained an upward trend in late November, benefiting from a market style that favored dividends.

Since the stock price low in November 2023, HAIER SMARTHOME has experienced two significant roller coaster trends, with periodic characteristics notably more pronounced than those of its competitors.

Looking to the future, how should the market performance of HAIER SMARTHOME be viewed? What will its growth potential be?

01

In the first three quarters of 2024, HAIER SMARTHOME's revenue was 202.97 billion yuan, a year-on-year increase of 2.17%. Broken down, the third quarter only saw a slight year-on-year increase of 0.47%, compared to a slowdown of 5.65 percentage points from the 7.53% of the same period in 2023.

Looking at a longer timeframe, from 2021 to 2023, HAIER SMARTHOME's year-on-year revenue growth rates in the first three quarters were 9.86%, 8.95%, and 7.5% respectively. Thus, it can be seen that the revenue slowdown in recent years has formed a trend, rather than being an isolated event.

(Company's financial report situation for the third quarter in recent years, wind)

However, HAIER SMARTHOME's profit has performed better than its revenue. In the first three quarters of 2024, the company's net profit attributable to the parent company was 15.15 billion yuan (which is lower than Midea Group Co., Ltd's 31.7 billion yuan and Gree Electric Appliances, Inc. of Zhuhai's 21.96 billion yuan), reflecting a year-on-year growth of 15.44%. Moreover, it has maintained double-digit growth over the past few years.

This is mainly because the company has achieved some success in cost control. In 2017, the company's total expense ratio during sales periods reached as high as 25.62%, setting a new historical high. By the end of the third quarter of 2024, it has been reduced to 22.09%. Of course, compared to peers in the home appliance industry, HAIER's cost control is not particularly outstanding. According to Statistics from Wind, the latest total expense ratio for Midea Group Co., Ltd is 15.66%, and for Gree Electric Appliances, Inc. of Zhuhai it is 12.33%.

This has also led to significant discrepancies in the profitability of the three leading home appliance companies. As of the end of the third quarter of 2024, HAIER's net profit margin was 7.6%, Midea Group Co., Ltd's was 10%, and Gree Electric Appliances, Inc. of Zhuhai's was 14.5%.

Net margin also reflects the significant difference in their return on equity (ROE). In 2023, HAIER SMARTHOME's ROE was 16.85%, significantly lower than Gree Electric Appliances, Inc. of Zhuhai's 27.2% and Midea Group Co., Ltd's 22%, which has been the case for a long time.

Additionally, against the backdrop of a continuously rising net margin in recent years, HAIER's ROE has actually weakened. According to the DuPont analysis breakdown, the company's asset turnover ratio and equity multiplier have both shown a downward trend, reflecting some operational changes.

Now let's look at dividends. Since its IPO in 1993, HAIER has distributed dividends 29 times, with an average dividend rate of 29.9%. However, there is a highlight: in recent years, the indicator has improved, with the dividend rate for 2023 being 45%. In comparison, Midea Group Co., Ltd's average dividend rate since its IPO is 42% (61.6% in 2023), and Gree Electric Appliances, Inc. of Zhuhai's average dividend rate since its IPO is 47.8% (45.3% in 2023). This shows that the latter two companies are more generous in terms of dividends.

In summary, HAIER's revenue growth has clearly slowed down, while profits remain high due to factors like cost control. Furthermore, in terms of profitability and dividend levels, it is not as strong as the two major competitors, Midea Group Co., Ltd and Gree Electric Appliances, Inc. of Zhuhai.

02

Looking ahead at HAIER's performance growth potential, it is necessary to analyze it separately in the context of the domestic and overseas markets.

HAIER's share of total revenue from the domestic market has been continuously declining, plummeting from 87.3% in 2014 to 47.67% in 2023. Overall, it can be seen that revenue from the domestic market has already entered a phase of slow growth. From 2018 to 2023, revenue grew from 105.8 billion yuan to 124.6 billion yuan, with a compound annual growth rate of only 3.3%. This is significantly lower than the 8.2% of Midea Group Co., Ltd in the same period.

Of course, with the continuous decline of the real estate market in China, the domestic home appliance business will face significant challenges and pressures.

In 2021, China's real estate market reached a historic peak, after which it entered a rapid downward cycle. In the first 11 months of 2024, the national sales area of commercial housing was 0.86 billion square meters, a reduction of 0.72 billion square meters compared to 1.58 billion square meters in the same period of 2021, a sharp decrease of 45.6%.

This reduction is quite large, and real estate sales have not yet bottomed out. There will be a lag effect of 1-2 years from the sale of commercial housing to the generation of home appliance demand.

In 2022, real estate began to decline sharply, coupled with the downgrade in home appliance consumption, signs of weakness in the downstream home appliance sector became clearly evident in the first half of 2024. According to Statistics, the retail volume of white goods in China in the first half of the year was 77.74 million units, a year-on-year decline of 3.6%, and the retail value was 231.9 billion yuan, which also saw a significant year-on-year decline of 7%.

To stabilize economic growth, the country has continuously introduced policies in recent years to strongly stimulate the demand for home appliance consumption. Compared to the previous round of appliance subsidies in China from 2007 to 2010, the current subsidies for upgrading old appliances to high-efficiency appliances are much greater, which will greatly benefit the improvement of weak home appliance consumption.

After being generally sluggish in the first half of the year, with the strong rise under the 'old for new' subsidy policy in the second half, the retail scale of the home appliance market in 2024 is expected to exceed 900 billion yuan, once again breaking the historical record set by home appliances in 2019.

However, it is worth noting that home appliance policy subsidies stimulate the advancement of home appliance renewal demand, which essentially overdraws future demand. Coupled with the significant decline in commercial housing over the past few years, it is highly likely that the domestic home appliance sector will return to a state of weakness.

This may also mean that during the prolonged downward cycle of real estate, HAIER SMARTHOME's rapid growth in domestic business may never return, and maintaining slow or no growth will be the baseline assumption for future Trades.

03

In recent years, HAIER SMARTHOME's total revenue has maintained certain expansion, mainly benefiting from the explosive growth in overseas markets. In 2014, HAIER's overseas revenue was 10.7 billion yuan, accounting for only 12% of total revenue. By 2023, revenue has increased to 135.678 billion yuan, accounting for 55.5%.

(Source of company revenue by region, wind)

HAIER SMARTHOME's overseas revenue has grown rapidly, mainly due to aggressive acquisition strategies. According to Statistics, in 2015, the company acquired the white appliances business of SANYO Electric in Japan; in 2016, the company acquired the appliance business of General Electric in the USA; in 2018, the company acquired Fisher & Paykel; and in 2019, the company acquired Candy.

In addition, with its own brand expanding overseas, the company has gained significant influence in the overseas market. According to Euromonitor data, in 2023, HAIER SMARTHOME ranked first in retail volume of white appliances in the Asian market with a market share of 26%, ranked second in the Americas with a market share of 15.8%, ranked first in Australia and New Zealand with a market share of 14.6%, and ranked fourth in Europe with a market share of 8.8%.

However, with the overseas revenue base continually expanding and the overall slowdown of the global economy leading to weakened demand for household appliances, the company's overseas business is likely to encounter some growth bottlenecks in the future.

Looking at the current situation, the growth rates of HAIER SMARTHOME's overseas business revenue from 2021 to 2023 are 13.2%, 9.91%, and 7.6%, indicating a noticeable slowdown.

In the future, in the overseas market, HAIER SMARTHOME will face fierce competition from giants like Midea Group Co., Ltd. On one hand, Midea Group's foreign business has grown rapidly, with revenue skyrocketing from 49.785 billion yuan in 2014 to 150.9 billion yuan in 2023, and its absolute value is higher than that of the former.

On the other hand, Midea Group places great importance on overseas markets, expanding its scale through independent brand expansion and acquisitions. Their operational strategies mainly include expanding production capacity in growth potential markets like Europe, Latin America, Africa, India, and Southeast Asia, enhancing overseas production scale and quality; establishing joint ventures with leading companies in countries like Brazil, Egypt, and India to accelerate expansion; and acquiring leading companies like Toshiba Living and KUKA Group.

For many years, the overseas market has been large enough for Midea Group and HAIER SMARTHOME to work alongside each other and capture market share from overseas home appliance companies. However, in the future, amidst a backdrop of significantly increased market concentration and a downturn in overseas home appliance prosperity, the two domestic home appliance giants, Midea Group and HAIER SMARTHOME, will almost inevitably come into direct confrontation.

From the current situation, Midea Group has a slight edge in overseas operations. This can be observed from the scale of operation and profitability.

From 2021 to 2023, HAIER SMARTHOME's overseas gross margins were 28.21%, 26.92%, and 26.77%, respectively, showing a downward trend and significantly lower than the gross margin level in the domestic market. Midea Group's overseas gross margin, on the other hand, has maintained an upward momentum, rising from 21.76% in 2021 to 27.16% in 2023, setting a record high and being somewhat higher than the domestic market.

04

For domestic home appliance companies, northbound funds have always been relatively bullish. As of September 30 last year, northbound funds held 85.9 billion yuan of Midea Group, 27.72 billion yuan of Gree Electric Appliances, Inc. of Zhuhai, and 20.71 billion yuan of HAIER SMARTHOME, accounting for 16.15%, 10.27%, and 10.29% of their holdings, respectively. In terms of fund size and holding proportion, foreign capital is clearly more optimistic about Midea.

Domestic capital is also not pessimistic about the leading home appliance manufacturers. The main logic is not that they are optimistic about the growth potential of home appliance giants, but due to cautious market risk preference and the dominance of dividend styles, they have increased the allocation ratio of the home appliance sector.

However, after more than a year of continuous growth, the valuations of these three home appliance giants are no longer considered cheap (based on their growth potential). According to Wind, Midea's latest PE is 15.2 times, HAIER SMARTHOME 13.9 times, and Gree Electric Appliances, Inc. of Zhuhai 8.3 times.

In the future, even if choosing to allocate to home appliances, the overall expectation for ROI needs to be lowered, as the performance growth characteristic is increasingly weakening, and the high returns from the past upward cycle of the Real Estate market are gone for good.