China White Goods:Strong AC growth in December driven by channel re-stocking

Air conditioner (AC) total sales (sell-in) rise 42% yoy in December

    China IOL released AC shipment data for December 2016 on 18 January 2017. Production volume rose 52% yoy to 11m units, continuing its upward trend from 3Q16 (+29%). Total sales (sell-in) increased 42% yoy to 9m units, driven by substantial domestic shipment growth of 82% yoy in December. China IOL attributed the strong domestic shipment to 1) distributors advanced shipments in concern of ex-factory price raise, 2) lagging demand from new home sales driven by strong residential property sales (up by 24% yoy) in the first eleven months of 2016. By brand, the domestic shipment volume of Gree, Midea and Haier increased 59%/156%/48% yoy to 2.7/1.1m/0.4m units, respectively. For 4Q16, domestic shipments rose 67% yoy to 5.2m units.

    Deutsche Bank’s comments

    The rise in shipment volume in domestic market is within our expectation, as we believe brands are re-stocking in the channel in 2H16 until 1H17. Also, distributors are willing to take more inventory given high sales rebate and improved working capital. According to Ms. Suo Xiao-fang, research director at China IOL, AC inventory (channel + manufacturers) was 34m units at end- Nov 16, and is estimated to increase to 37m units by end-Mar 17. This is still a controllable inventory level as it is below the warning zone of 40m units.

    Our top pick in the home appliance sector is Gree, which has a dominant market position in air conditioners. We believe Gree is more resilient given its industry exposure (~90% of its sales are from air conditioner vs. Midea’s 40% and Haier’s 20%). Key catalysts include 1) management purchasing shares in the open market, 2) an increase in dividend payout ratio, and 3) M&A deals.