Haitong: Huge Potential in the Southeast Asian Home Appliance Market, Rise of Chinese Brands.

.580% GDP2005-201550%-60% 2005-201518% 1.4 1.5 $20,000, urbanization rate of 79%, level of development comparable to China.Indonesia, Thailand, the Philippines, and Vietnam: In 2023, the per capita GDP of Indonesia, Thailand, the Philippines, and Vietnam is $4248, $6385, $3668, and $3817 respectively, which is equivalent to China's levels in 2007, 2012, 2006, and 2006 respectively. The urbanization rates of Indonesia, Thailand, the Philippines, and Vietnam in 2023 are 59%, 54%, 48%, and 39% respectively, which is equivalent to China's levels in 2018, 2014, 2009, and 2003 respectively. Overall, in terms of the economic levels of Southeast Asian countries in terms of per capita GDP and urbanization rate, Singapore has a higher level of development than China, Malaysia is basically equivalent to China, and Indonesia, Thailand, the Philippines, and Vietnam are at a level similar to China's development level from 2005 to 2015. According to the data from the National Bureau of Statistics, the retail sales of household appliances and audio equipment in China were 161.3 billion yuan in 2005 and 827 billion yuan in 2015. During this period, China stimulated the demand for household appliances through policies such as promoting household appliances in rural areas and trade-in programs, with a compound annual growth rate of 18% over ten years. Looking ahead, the compound annual growth rate of retail sales of household appliances is expected to be 12% from 2005 to 2020 and 10% from 2005 to 2023. Looking back on the development of the domestic household appliance industry, the domestic household appliance industry experienced a period of rapid growth from 2000 to 2012. As the policies stimulating household appliances gradually faded, the number of household appliances increased significantly. After 2012, the growth rate of the household appliance industry slowed down, but the industry entered a new stage of gradual upgrade of product structure. According to price data monitored by Zhong Yikang, from 2012 to 2020, the average price of refrigerators and washing machines in the offline market in China increased from 2891 yuan and 2061 yuan to 4740 yuan and 3375 yuan, respectively, an increase of 64%. According to Euromonitor data, the compound annual growth rate of the household appliance industry in Southeast Asia from 2018 to 2023 was 5%. Currently, the penetration rate of Southeast Asia is similar to that of China around 2010. We believe that the Southeast Asian household appliance market is expected to gradually enter a stage of product structure upgrade, and based on the growth rate levels in China after 2010 and the current price difference with China, we believe that the Southeast Asian household appliance market still has the potential to achieve an industry growth rate of around 5%-10%. 2. Different category performance differentiation, Chinese brands increase their voice 2.1 Category performance: TV and refrigerator penetration rates reach 80%, AC penetration rates still need improvement In terms of the pace of penetration of Chinese household appliance categories, the urban penetration categories in China are washing machines, TVs, refrigerators, and air conditioners, while the rural penetration categories are TVs, washing machines, refrigerators, and air conditioners. In terms of the pace of penetration of household appliance categories in Southeast Asia, it presents a development path similar to China, with TVs achieving universal coverage earlier, while air conditioners have a relatively late penetration. Overall, based on population size, we estimate that by 2023, each household in the six Southeast Asian countries will have approximately 80 TVs and refrigerators, and 50-55 air conditioners and washing machines, and 145 electric fans. 2.2 Competition pattern: Japanese and Korean brands dominate, Chinese brands increase their voice Current situation: From the perspective of the competitive landscape in the Southeast Asian market, we found that Korean brands still dominate the Southeast Asian market, followed by Japanese brands. As Chinese companies gradually acquire foreign brands (such as Toshiba) and establish related factories in Southeast Asia, Chinese brands are gradually gaining a certain market share in Indonesia, Thailand, and Vietnam. In addition to developed countries such as Singapore where domestic brand shares are low, Chinese brands have higher acceptance rates in the other five Southeast Asian countries. In terms of categories, Chinese brands (including acquired brands) account for close to 30% market share in Indonesia and Thailand in the TV category, while accounting for around 10-20% market share in Malaysia, the Philippines, and Vietnam; Chinese brands (including acquired brands) account for over 15% market share in Indonesia, Thailand, Malaysia, and Vietnam in the refrigerator and washing machine categories, but most rely on acquired brands (such as Haier acquiring Aqua/Midea Group Co., Ltd acquiring Toshiba) to gain market share advantage. The sales share of air conditioners in Indonesia, Thailand, Malaysia, and Vietnam all exceeds 20%. Due to the increased visibility of Chinese TV brands in global sports events and the strong global position of the Chinese air conditioning industry, the acceptance of Chinese TV and air conditioning brands in Southeast Asia is higher, and they also enjoy a higher market share. Changes: Compared to 2018, Chinese brands (including acquired brands) have significantly increased their market share in Southeast Asian countries, facing competition head-on with the popular Korean brands, and Japanese brands have gradually begun to lose ground in the Southeast Asian market, with their market share gradually declining in the past five years, except in the air conditioning field, where they still maintain a relatively leading market position. 3. Gradual development of Chinese household appliance companies in Southeast Asia TV companies were the first to enter Southeast Asia. Overall, in terms of the timeline of Chinese companies' expansion into Southeast Asia, home electronics entered before white goods and small appliances. We believe this is related to the early globalization of TV companies and the advanced development of the local TV industry compared to white goods and small appliance companies. The industrial cluster effect of Southeast Asian layout is forming. Currently, Chinese household appliance companies are gradually expanding in ASEAN and have gradually formed an industrial cluster effect. For example, in Vietnam, the main industries are vacuum cleaners, mobile phones, and TVs, with companies like Kingclean Electric, Ningbo Dechang Electrical Machinery Made, and Ningbo Fujia Industrial setting up vacuum cleaner production bases in Vietnam, and many display companies such as BOE and Zhaochi are expanding in Vietnam; in Thailand, the main industry is air conditioning and refrigeration appliances, such as Haier's subsidiary, benefiting from Indonesia's large population base, the demand for household appliances is gradually increasing, and various companies are beginning to expand in Indonesia in areas such as air conditioning and small appliances. 3.1 Dark electric field: First to enter, brand first, marketing is the key TVs lead white goods into the Southeast Asian market. Chinese TV brands are at the forefront of overseas expansion in Southeast Asia in the home appliance field, 199Konka began a joint venture in Indonesia eight years ago, TCL entered the Vietnamese market in 1999 by acquiring a color TV factory, Changhong built a factory in Indonesia in 2000, and the color TV sector started expanding into Southeast Asia earlier than the white goods sector.(1) TCL ELECTRONICS: Vietnam is the main battlefield, perfecting local manufacturing TCL began to layout the Vietnam market in 1999, In 2019, the construction of the TCL Pingyang factory in Vietnam was initiated to expand to the North American market from Southeast Asia. At present, TCL's business in Vietnam has two main functions: supplying the Vietnam and ASEAN markets, and serving as part of the global supply chain. According to TCL ELECTRONICS 2023 annual report, TCL's intelligent screen retail volume ranks first in Southeast Asia in the Philippines and Myanmar, and fourth in Vietnam and Thailand. In 2023, TCL's revenue in emerging markets reached 21.3 billion Hong Kong dollars, accounting for 27% of the company's total revenue and 46% of its overseas revenue. Risk warning: demand may fall short of expectations, intense brand competition (2) Hisense Visual Technology: Establishing ASEAN headquarters and strengthening the Southeast Asian market Hisense Group established the ASEAN headquarters in 2022 to strengthen the Southeast Asian market. Hisense Home Appliances Group and Hisense Visual Technology jointly established a joint venture in 2023 to promote the company's global development strategy, expand business development and brand building in the ASEAN region, and carry out brand investment and product marketing locally. Hisense Visual Technology's brand strategy in the Southeast Asian market is to operate with both the Hisense and Toshiba brands. In 2023, the company continued to enhance its regional management capabilities, significantly increase channel and store numbers, optimize network layout and sales touchpoints, and further expand market space. According to Hisense Visual Technology's 2023 annual report citing GfK data, Hisense's TV retail market share in Malaysia and Thailand is 11.25% and 14.03% respectively. In terms of marketing, both TCL and Hisense continue to increase investment in the sports arena. Hisense continues to market during world-class events such as the World Cup and Euro Cup, while TCL has repeatedly become the global official sponsor of the Copa America football tournament, gradually enhancing the brand influence of Chinese brands in the global market. Risk warning: demand may fall short of expectations, intense brand competition 3.2 Home Appliance Field: Gradual development, from production capacity to branding Thailand is the largest home appliance manufacturing country in Southeast Asia. Over the years, major manufacturers from Japan, South Korea, and China have successively established factories in Thailand, making Thailand the world's second-largest white goods manufacturing country after China. This is mainly due to the restructuring of the global home appliance manufacturing industry chain in recent years, and Thailand has successfully absorbed factory capacity transfers from Japan, South Korea, and China. The investment of Chinese manufacturing companies in Southeast Asia is increasing, and showing the characteristics of industrial clustering. For home appliance companies, the main reasons why many of them consider transferring production capacity to Southeast Asia are: comprehensive costs, customer requirements, localization, etc.First, in the short term, facing the European and American markets, reducing costs and avoiding risks through capacity transfer. In the past decade, China's share in the US home appliance import market has been continuously decreasing, while Mexico's share has increased significantly. At the same time, Southeast Asian countries such as Vietnam have seen a significant increase in their share of the US home appliance import market over the past decade. In the short term, Southeast Asia's cost advantage mainly lies in: (1) production costs: due to lower labor costs in Southeast Asia compared to China, if labor efficiency improves in the future, production costs in Southeast Asia are expected to be lower than in China; (2) tax incentives: Southeast Asian countries provide additional tax incentives from the government to attract foreign investment, effectively reducing costs; (3) tariff costs: Chinese companies are accelerating capacity deployment in Southeast Asia and other regions to actively avoid potential future tariffs. In addition, many contract manufacturing companies establish production capacity in Southeast Asia at the request of customers in order to secure their share in major customers' procurement. Second, in the long term, enhancing brand awareness and deepening localization to tap into the local market. Currently, most of China's capacity in Southeast Asia caters to the needs of European and American customers, with a smaller proportion catering to local needs. However, in the long term, Southeast Asia has a large population and significant potential for future home appliance development. From a competitive perspective, Chinese brands still lag behind Japanese and Korean brands in terms of overall brand awareness. However, based on the development trend over the past few years, the recognition of Chinese brands in Southeast Asia is gradually increasing. With the acquisition of influential brands in the region, Chinese companies have a competitive advantage in the Southeast Asian market, and there is still a large room for growth for Chinese companies. Globally, Chinese leading home appliance companies are gradually growing into global leaders in the industry. Comparatively, domestic brands in China have become the main players in the domestic home appliance market over the past 30 years, with stronger product capabilities, cost-effectiveness, and a wide marketing network. Japanese and Korean brands are gradually fading away in the domestic market. In the future, with the advancement of Chinese companies in Southeast Asia in terms of localization, quick realization of local services, on-site delivery, and after-sales support, Chinese brands are expected to deeply tap into the local market. Investment recommendations: Focus on the incremental growth brought about by going global. With a large population base, rapid economic development, significant potential for home appliance market development, and the increasing popularity of Chinese brands in Southeast Asia, there is still plenty of room for development. With Chinese brands actively expanding overseas production capacity and brand presence, overseas markets are expected to gradually contribute to incremental growth, driving overall steady growth for companies. Risk warning: Fierce competition at the end market, slow progress in brand internationalization.