JPM-China Home Appliance Sector Attractive valuation, wait for fundamental silver lining-20250826

<p style="text-indent:28px"><span style="font-size: 14px;">China home appliances (homeapp) is one of our most favored sectors (in additionto IP, sportswear, beer and fast-food chain). We like its diversified product &amp;geographic exposure, high &amp; stable profitability, and strong management &amp;execution. However, it is also one of the most cyclical sectors within the Chinaconsumer universe (in addition to agrifood, luxury and durables). Year-to-date,China big/small homeapp sector share prices are up 1%/41% (vs SHSZ300 indexup 13%), though 7M25 sector retail sales were up 30% yoy on stimulus policy(effective from Sep 2024). China big/small homeapp now trade at 11.8x/23.3x2025E P/E and 10.5x/19.5x 2026E P/E. We believe current valuations have largelydiscounted the forthcoming sector sales slowdown, while future price movementshould be driven mainly by fundamental change. We think 4Q25 is likely to be theworst. Once the domestic sales decline normalizes, overseas sales pick up,stimulus policy extends, and property/macro recovers, we expect the fundamentalimprovement to drive a valuation re-rating for the whole sector.</span></p><p style="text-indent:28px"><span style="font-size: 14px;">•7M25 sector retail sales up 30.4% yoy (well outpacing overall retail sales up4.8% yoy and furniture sales up 22.6% yoy). We estimate 90% of total sales arecoming from consumer purchases with trade-in subsidy benefits. With the2025 full-year subsidy budget of Rmb80-100bn (of which, JPMe Rmb54bnwas deployed in 5M25), we expect sales to remain strong over Sept-Dec 2025;however, yoy growth might slow to single-digit or even negative (which wouldcause further share price pressure, in our view). There has been no officialannouncement on whether the subsidy policy will be extended in 2026.</span></p><p style="text-indent:28px"><span style="font-size: 14px;">•Brands starting to cut production plans to reduce inventory risks.Anticipating yoy slowing demand in 4Q25, brands have started to cutproduction plans. For air-conditioning , ex-factory sales shipment volumegrowth remained strong in Jun (up 16.5% yoy, accelerating from 5.5% in Aprand 13.4% in May). However, industry production plans were lowered to 8.1%yoy for Jul and -11.9% yoy for Aug (further cut from the -9.2% plan made 2months ago). We see the same trend for refrigerators and washing machines.</span></p><p style="text-indent:28px"><span style="font-size: 14px;">•Our order of stock preference: see page 3.</span></p><p><br/></p>