CITIC Securities: Opportunities for recovery in the home appliance sector have emerged, and it is expected that the government subsidy policy will continue to support demand until 2026.

CITIC SEC released a research report stating that by 2025, the performance of the household appliance sector's stock prices will be inferior to the overall market, with fund holdings at historical lows. However, opportunities for recovery have already begun to emerge. Domestic demand remains resilient with the support of the "replacement of old with new" policy, and CITIC SEC expects that in 2026, the government subsidy policy will continue to support demand. On the external demand side, the impact of tariffs is gradually diminishing, with companies accelerating their overseas localization operations, while the growth potential in emerging markets remains vast. It is recommended to focus on areas such as the promotion of domestic demand policies, expansion into emerging markets, and the upgrading of household appliance structures, and to select top household appliance companies with scale and technological strength. CITIC SEC's main points are as follows: - Industry Review of 2025: The sector lagged behind the market, with fund holdings at a low level, awaiting recovery in the future. - Since 2025, the household appliance sector has underperformed the Shanghai and Shenzhen 300 Index, mainly due to disturbances in domestic demand caused by the tapering of government subsidies in June, high base numbers, tariff fluctuations, and the weakening trend in Q3 in emerging markets. Looking at fund holdings, the proportion of household appliances in major funds fell to 1.93% from Q1 to Q3, with a decrease in allocation to white goods and black goods, a continued low allocation to small household appliances, and some recovery in components. Looking ahead, institutional holdings of household appliances are currently at historically low levels. If domestic demand policies are implemented, external disruptions are alleviated, and the fundamentals of the sector improve, leading companies still show potential for value. - Focus on the five major themes of 2026: 1. The "replacement of old with new" policy is expected to continue, stabilizing domestic sales of household appliances. In 2025, government subsidies expanded, with 300 billion yuan already issued according to the National Development and Reform Commission. From January to November, consumers purchased over 128 million units of 12 major household appliances under the policy, with an estimated expenditure of over 80 billion yuan, effectively stimulating the replacement and structural upgrading of existing household appliances. Looking ahead to 2026, we expect the government subsidies to continue, possibly with narrowed categories or continued issuance in limited quantities to avoid rapid fund exhaustion, effectively supporting domestic sales demand for household appliances. 2. The impact of tariffs is gradually diminishing, with a focus on the development of emerging markets. Since the beginning of the year, tariffs in North America have fluctuated, with Chinese household appliance companies resuming exports to the United States as trade talks have stabilized. Additionally, these companies are accelerating the expansion of production capacities overseas in response to potential tariff uncertainties. Sales of air conditioners have seen fluctuations due to pre-tariff stocking and temperature variations, while refrigerators and washing machines have remained relatively stable. Considering the low penetration rates in emerging markets and room for growth in Chinese market share, we are optimistic about the future development prospects of Chinese companies in emerging markets. 3. Focus on the development space of Mini LED in black electronics. Mini LED televisions are in an accelerated phase of technological and cost-driven penetration, driven by: 1) a systematic reduction in costs in PCBs/chips/driver ICs; 2) leading companies launching new models intensively, actively expanding price bands and size segments; 3) a global trend towards larger screens in the television market. According to Omdia data, China has taken the lead in the popularization phase, with global penetration rates transitioning from single digits to double digits, and growth in overseas markets spreading from mature markets to emerging markets. Currently, Chinese brands have a competitive advantage in the global Mini LED market. According to Omdia data, as of Q3 2025, TCL Electronics and Hisense Home Appliances Group held steady at 31% and 24% respectively in global Mini LED television shipments, while Samsung Electronics/LG Electronics held global shares of 19%/7% respectively. The industry is moving towards consolidation among top brands with scale and technological capabilities. 4. Focus on the rebound of commercial cold chain in 2026. The leading cold chain company has laid out four major cold storage businesses, with frozen business reaching a turning point and emerging businesses continuing to grow. According to company financial reports, revenue and profit bases of frozen cabinets declined by 40% in both 2024Q2 and 2025Q2, falling below the high point of 2023Q2 by 40%. As major customers like Yili, Mengniu, and Wall's saw double-digit revenue growth in mainland China in the first half of 2025, we believe that capital expenditures of these companies are expected to increase marginally in 2026. The refrigerated display cabinet business has broken through, with significant gains in market share from strategic customers such as Coca-Cola and Pepsi, while driving the high-margin smart cabinet business. The development of commercial super cabinets targeting new retail formats is driving rapid revenue growth. 5. Focus on the transformation of component companies, especially in the liquid cooling direction. With the acceleration of AI applications, data centers are evolving towards high power density, making liquid cooling increasingly favorable due to its comprehensive performance and economy compared to air cooling. Companies specializing in appliance temperature control and component manufacturing, with years of experience in refrigeration system design, heat management optimization, fluid control, and integrated unit assembly, are smoothly transitioning into the liquid cooling field. They can leverage existing core temperature control capabilities (such as precision temperature control algorithms and heat dissipation component design experience) to quickly adapt to the liquid cooling needs of high-density data centers, thus efficiently seizing opportunities for industry upgrading. Fluctuations in raw material prices have relatively limited impact. According to Wind data, as of December 19, the average prices of copper and aluminum have increased by 17% and 5% respectively year-on-year since Q4 2025. ABS (Acrylonitrile Butadiene Styrene), PP (Polypropylene), and PS (Polystyrene) have decreased by 27%, 14%, and 27% respectively year-on-year, resulting in differentiated impacts on the cost index of white goods, with air conditioners/refrigerators/washing machines increasing by 3%/-1%/-3% respectively year-on-year. The rise in copper prices will have a relatively controllable impact on profit margins (assuming a gross profit margin of 24% for white goods companies, we calculate that a 15% year-on-year increase in copper prices corresponds to a -2.9/-1.4/-1.3 percentage point year-on-year drop in the profit margin of air conditioners/refrigerators/washing machines). Leading companies can lock in prices or hedge against copper price fluctuations, mitigating the impact. If raw material prices remain high and volatile in 2026 Q2-Q3, cost pressures may rise again. In extreme scenarios, a further 10% increase in copper/aluminum prices throughout the year could lead to a 10-14%/6-8%/3-4% year-on-year increase in the cost index for white goods companies. Risk factors include fluctuations in tariff policies, lower-than-expected downstream demand, increasing industry competition, significant fluctuations in raw material costs, and inaccurate data provided by third-party data providers. Investment strategy. We recommend focusing on the following investment targets in 2026: 1) Beneficiaries of the expected continuation of government subsidy policies in 2026 which support consumer spending, with a focus on leading white goods companies; 2) Companies with manufacturing and brand advantages overseas. Facing the trillion-dollar overseas market, companies with global production layout and proprietary brand capabilities have significant advantages. Through localized supply chain construction based on "regional supply for regional demand," they can effectively avoid trade risks, enhance profitability stability, and continue to enjoy the growth dividends of emerging markets; 3) Mini LED is in a period of rapid global popularization, with the two leading Chinese companies taking the lead globally, with an optimized structure that is expected to accelerate; 4) Leading companies in commercial cold chain, with stabilized frozen cabinet business and rapid growth in refrigerated display cabinets, commercial super cabinets, and smart retail cabinets driven by increased market share among key customers and new business formats. With flexible production capacity and competition reduction through international expansion, profitability is expected to continue to improve; 5) Component companies focusing on transformation and upgrading, especially in liquid cooling technology in AI data centers and other emerging high-growth sectors.