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China’s small appliance makers plug into faster market growth

Analysts see huge growth potential for China’s small appliances market over the long term, driven by product upgrades and demand from smaller cities

PUBLISHED : Monday, 27 June, 2016, 4:14pm
UPDATED : Monday, 27 June, 2016, 4:14pm

Small appliances are gaining growth momentum in China on the back of consumer upgrades and increasing demand in lower-tier mainland cities, said market watchers.

Citic Securities and Guotai Junan Securities both reiterated their “Outperform” rating on China’s small appliance sector.

More frequent purchases of small appliances should sustain stable growth amid diverse product offerings and upgrades, while growing penetration of small appliances in tier three and tier four cities will also contribute to growth.

Sales of small appliances in China are expected to reach 460.8 billion yuan in 2020, driven by annual growth of 12 per cent in the five year period from 2016 to 2020, according to the data from cheaa.com, a Chinese website focused on the home appliance industry, and analysis by Guotai Junan Securities.

The popularity of small appliances in China is lower than other developed countries. The ratio of small appliance sales to large household appliance sales was only 0.27 in China in 2015, far lower Japan’s 0.86. The ratio in South Korea, Brazil and Russia reach 0.5, 0.39 and 0.44 respectively in 2015, all higher than China, according to data from GfK research and Guotai Junan.

The growth momentum comes from product upgrades and new offerings of small appliances, Zeng Chan, an analyst from Guotai Junan, wrote in a report.

Rice cookers, pressure cookers and induction cookers all have a high level of ownership in China now.

There is high demand for product upgrades of these older, small appliances because their quality and price are much lower than those in developed countries
Zeng Chan, Guotai Junan

“There is high demand for product upgrades of these older, small appliances because their quality and price are much lower than those in developed countries,” Zeng said. Consumer upgrades of these old, small appliances will directly benefit main small appliance brands such as Zhejiang Supor Cookware, Midea Group and Zhejiang Aishida Electric.

Guangdong Xinbao Electrical Appliances, a leading small home appliance maker, is recommended by Guotai Junan.

The unit prices of small appliances will increase after newer, upgraded models are introduced. The average price of a rice cooker has been increasing, from about 250 yuan in early 2011 to above 450 yuan in 2016, the data from Guotai Junan shows.

New small appliance offerings are another driver of the industry’s growth. For example, water purifiers, the electric toothbrush, dust collectors and intelligent bidets are becoming more popular in China.

Jin Xing, an analyst at Citic Securities, said there is huge growth potential in China’s small appliances market but it would only materialise over the long term. “Given the low unit prices and substitution effect amongst different products, small appliances tend to grow more slowly over a longer horizon as compared to major appliances,” Jin wrote in a report. “Rather than casting the net wide across the sub-sector, we prefer leading names which have omnichannel management capabilities and are well-positioned for constant product line extensions.”

Jin suggested that investors watch Robam Appliances given the greater demand from home buyers who purchase appliances,and Vatti for its improving governance and fundamentals.

“Zhejiang Supor and Joyoung are two leading small appliance manufacturers worth a long-term investment for their strong bottom-line growth,” added Jin.

Besides small appliances, the kitchen appliance segment may also continue to outperform the broader appliance sector, Jin said.

“Over the longer term, we see potential for kitchen appliance manufacturers to double their revenue as they upgrade their products amid rising market concentration,” said Jin. “In the near term, incremental demand for kitchen appliances may exceed that for white goods, as home buyers during the earlier property sales boom start to purchase kitchen appliances in the second quarter of 2016 and beyond.”

Jin said China’s tier-1 leaders in kitchen appliances are adopting a “high-end product” strategy on “a moderate scale". This provides an opportunity for leading tier-2 manufacturers to move up the value chain and upgrade their product offerings.

Wei He, an analyst at Citic Securities, also said the kitchen appliance industry was booming, much as the white goods market did in the years from 2009 to 2013.

“We expect it to maintain an annual growth rate of about 8 per cent. Like other home appliance markets, this boom should result in the strong becoming stronger,” He wrote in a report. “We suggest investors buy shares of leading kitchen appliance manufacturers, such as Robam, Supor, Joyoung and Midea.”

Kitchen appliances, including built-in kitchen appliances and small kitchen appliances, have replaced white goods to become the demand growth driver of the home appliance sector, He said.

“As consumer purchasing power grows, branded home appliances are favoured and brand concentration rises,” he added. “Online channels are changing their emphasis on low prices.”

There are still investment risks from fluctuations in market demand, analystswarned.

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