Zheshang: Valuation of white goods is at historically low levels, presenting a buying opportunity.

Zheshang released a research report stating that the current valuation of the white goods industry is at a historically low level since 2010. Against the backdrop of the rise in the valuation of the Shanghai and Shenzhen 300 Index, there is a "buy low, sell high" opportunity in the white goods sector. Although the short-term outlook for the industry may be weakening, the long-term growth prospects remain solid. With expectations of increased dividend payout ratios and a decline in government bond yields, valuations are expected to stage a temporary recovery. Key stocks to watch include Midea Group Co., Ltd(000333.SZ), Gree Electric Appliances, Inc. of Zhuhai(000651.SZ), and HAIER SMARTHOME(600690.SH). Zheshang's main points are as follows: How is the current valuation of the white goods industry viewed? The valuation of leading companies in the white goods industry is currently at a historically low level since 2010. While the valuation of the Shanghai and Shenzhen 300 Index has been rising this year, the valuation of white goods has been declining. In a bull market environment, the bank believes that there is a "buy low, sell high" opportunity for white goods. Despite a marginal decline in short-term industry sentiment, the long-term growth potential remains intact. Additionally, an expected increase in dividend payouts and a possible decrease in government bond yields could support a temporary rebound in valuations. How did the white goods sector perform in the previous A-share bull market? During the bull market period from 2014.3.12 to 2015.6.12, the cumulative returns of the three major white goods companies did underperform the Shanghai and Shenzhen 300 Index and the Shanghai Composite Index. However, during the rapid upward movement of the indices, the white goods companies were able to outperform. Similar to the present situation, during the bull market period of 2014Q2-2015H1, the white goods sector also faced a decline in sentiment, and it was not until the end of 2015 that it officially reached a demand bottom. However, the rebound in valuations began in November 2014 when Midea Group Co., Ltd's valuation fell to the same level as the Shanghai and Shenzhen 300 Index. Therefore, the recovery in valuations was mainly driven by capital inflows rather than fundamental bottoming signals. The bank believes that under a bull market mindset, one should consider the capital situation, rather than solely rely on fundamental factors for pricing. The ongoing reforms by the three major white goods companies to reduce channel inventories should have a positive impact on sales volume in 2026, especially against the backdrop of the phase-out of government subsidies in 2015. Looking at the capital side, the PE-TTM of Midea Group Co., Ltd is already lower than the valuation of the Shanghai and Shenzhen 300 Index. Where will the funding come from to increase valuations? 1) The new regulations for public funds may strengthen the preference of public funds for white goods. Public funds hold a stake of over 10% in the three major white goods companies, with 5%-6% being passive index funds and the rest being actively managed equity and enhanced index funds. The "Action Plan to Promote the High-Quality Development of Public Funds" enhances the constraint effect of performance benchmarks, links fund management fees with investor returns, and increases the weighting of performance assessment for periods exceeding three years. This is expected to increase the preference of actively managed equity funds for high-quality white goods assets with high weights in mainstream performance benchmarks, good long-term returns, and relatively low volatility. Furthermore, assets with low deviation passive funds will continue to be allocated. Currently, the main benchmark is the Shanghai and Shenzhen 300 Index, and compared to the weight of white goods in this index, there is still room for significant increases in the allocation of actively managed equity funds to white goods. As a weighted stock in the Shanghai and Shenzhen 300 Index and the A500 Index, white goods will continue to benefit from the inflow of passive index funds. Along with the continued improvement in the dividend levels of white goods, companies like Midea Group Co., Ltd are also likely to be included in more dividend indices, benefiting from new passive fund inflows. 2) The current dividend yield of white goods is attractive, and insurance funds investing in white goods also have cost-effectiveness. The China Securities Regulatory Commission aims to have large state-owned insurance companies allocate 30% of new premiums each year to A-shares starting from 2025. While insurance funds tend to prefer sectors with a high proportion of state-owned enterprises, such as banks, non-banks, and transportation, the current dividend yields for white goods (7% for Gree, 5% for Midea) are already significantly higher than those of the banking and non-banking sectors. The bank believes that dividend yields are stable, and future increases in performance and dividend ratios are expected to further boost dividend yields. Additionally, the return on equity for white goods is significantly higher than that of banks. Therefore, current investments are cost-effective. Risks: Market volatility risks; uncertainties in international political and economic situations; increased industry competition risks; lower-than-expected downstream demand risks; risks of data statistic and calculation deviations.