Orient: Advantageous Production Capacity Layout & Tariff Relief, Growth Potential of Home Appliance Export Chain Expected to Return

Orient released a research report stating that the first quarter household appliances generally exceeded expectations. The subsequent domestic sales of household appliances are expected to continue to benefit from policy stimulus. Structurally, there is a differentiation in the K-line, with good performance in both high-end positioning and cost performance. In addition, this year's air conditioning peak season is expected to benefit from higher temperatures and lower inventory levels, making the second quarter household appliance demand worth anticipating. In April, white goods exports maintained steady growth, indicating potential in emerging markets. Disruptions to exports to the United States are also expected to ease. It is recommended to focus on high-quality white goods leading companies that continue to benefit from domestic policies, actively expand overseas, and improve their efficiency. Recommendations also include reshaping market shares in mature overseas markets, high-quality enterprises that can take advantage of short-term global supply chain advantages for overseas exports, and high-quality small household appliance enterprises that can benefit from the overflow of national subsidy product categories in the short term, and are expected to enjoy the demand dividend of emerging household appliance categories in the medium to long term. Key points from Orient: Starting from May 14th, the reduction of export tariffs to the United States will help relieve pressure on domestic shipments In mid-May 2025, China and the United States reached a significant agreement on trade in Geneva, Switzerland, adjusting export tariffs on goods such as household appliances. According to a joint statement, starting from May 14th, the United States will reduce the "equivalent tariffs" on Chinese goods from the original highest of 125% to 10%, with a validity period of 90 days. Due to this adjustment not involving other types of tariffs, the current export tariffs to the United States for major household appliance exporters are between 30% and 55%. Although relatively high compared to previous years, OEM companies under the FOB model are expected to regain negotiation space with customers. Customers with a high mark-up rate overseas may be able to bear the tariffs on their own. Therefore, the bank expects domestic shipments to gradually return to normal in May, with no significant signals of large-scale advance stocking yet. For enterprises with their own brands in overseas markets, the operability of transferring tariffs through price adjustments is enhanced. The United States market provides a solid foundation for exports and contributes to global expansion. Referencing data from ORE Research, the retail scale of the U.S. household appliance industry exceeded 110 billion US dollars in 2023. Although the market is mature, the scale is considerable. Chinese household appliance companies have in the past entered the US market through brand entry or OEM production models, enjoying the dividends of the U.S. market. Some companies saw significant growth in their U.S. business contributions in 2024. For example, leading black electronics companies such as Hisense Visual Technology, with competitive Miniled TV products and sports event marketing, have seen increases in market share and brand indices in the United States. Companies like Suzhou Alton Electrical & Mechanical Industry, a vacuum cleaner OEM enterprise, have strengthened research and development investment and deepened cooperation with global customers through custom solutions. In addition to the U.S. market, expanding into new global markets also contributes to new growth. Suzhou Alton Electrical & Mechanical Industry's non-U.S. market revenue share reached nearly 10% in 2024. Combined with the first quarter's better than expected results and sufficient order backlog, the bank believes that the underlying growth attributes remain unchanged. Establishing overseas production bases to mitigate risks and contribute additional flexibility from production advantages Using high-quality OEM companies for black electronics and vacuum cleaners as examples, in addition to benefiting from the income elasticity brought by U.S. business, they are also proactively building production bases globally to mitigate the risks associated with increasing U.S. export tariffs, and they are meeting the long-term three-in-one layout of research and development + production + marketing overseas. It is expected that the impact on the growth trend of U.S. business in the short term through capacity transfer will be relatively limited. Looking ahead, considering production advantages, companies like Hisense Visual Technology, with a production capacity of 10 million units at their Mexico factory, covering products of various sizes for the North American market, and enjoying zero tariffs under the United States-Mexico-Canada Agreement (USMCA), have advantages in terms of export costs and prices to the United States. Suzhou Alton Electrical & Mechanical Industry's super factory in Malaysia began large-scale production in May, enjoying a 10% preferential tax rate for exports to the United States until July 9th. Although it will be raised to 24% afterwards, it is relatively low. The bank expects there to be a possibility of customers showing more preference for their products, potentially leading to a tilt in orders towards them, which could benefit their income flexibility in the second half of the year. Risks 1. The effect of the domestic appliance replacement policy may not meet expectations; 2. Sharp fluctuations in raw material prices and exchange rates; 3. A significant increase in export tariffs to the United States; 4. Unexpected decline in overseas demand.