China Home Appliance Sector: UBS Evidence Lab: Smart appliance upgrade to accelerate; wider product line to boost market size

Consumers are interested in smart homes and willing to pay a premium Interest in smart homes has cooled off since 2013, with penetration rising slowly (c10%now for fridge/washing machine/A/C). However, our UBS Evidence Lab survey shows that 48% of respondents are very interested in smart homes and are willing to pay acRmb1,600 premium for these three smart appliances. In addition, the survey shows that for refrigerators, the importance of smart freshness retaining is behind only energy saving and general freshness retaining, implying that smart technology could become a selling point for which consumers are willing to pay if it can enhance consumer experience. We estimate smart modules cost less than Rmb100, so higher smart home penetration will boost gross margin.

Longer TV viewing time will bring opportunities to traditional TV brands

Smart TV accounted for 73% of total TV sales in 2015, and the share has risen further year to date. Our UBS Evidence Lab survey shows that most consumers (70%) intend to spend more time watching TV (currently 123 minutes/day). In terms of brand preference, Hisense (45% customer loyalty) and LeTV are more popular with consumers. We believe longer TV viewing time will boost the operation value of smart TV. Traditional TV brands will get a larger market share and user base if they can offer a good consumer experience.

Faster replacement and product line expansion to boost appliance market size

According to our UBS Evidence Lab survey, it takes five years on average for consumers to replace white/brown goods, less than the 10 years expected by the market. We believe replacement may accelerate, driven by improved functions brought about by smart appliances. In addition, the survey shows that average small appliance owner shipper household is 9.5 units in China, lower than the c25 units in developed countries.

We believe appliance market size will expand considerably over the next three years driven by quicker replacement and product line expansion.

We favour industry leaders on bigger appliance market size

In aggregate, we believe smart homes are the future and will boost gross margin; smart TV operations will boost the value of TV companies; quicker appliance replacement and product line expansion will expand overall appliance market size. We favour Haier (smart home leader), Hisense (strong TV operations), Midea (industry leader) and Robam (benefiting from consumption upgrade and product offering expansion) and have Buy ratings on all four companies.