Guolian Minsheng Securities: Maintains a "recommended" rating for the household appliance industry, benefiting from the appreciation of the yuan to attract foreign investment.

Guolian Minsheng Securities released a research report stating that a turning point is in sight, maintaining a "recommended" rating for the household appliance industry. Although the nominal exchange rate appreciation has some restraining effect on the recovery slope of exports and foreign exchange profits, the leading brands have room for price negotiation, overseas production capacity, and foreign exchange hedging to smooth fluctuations, with limited impact. In addition, the sector has a relatively high openness to the Mainland-Hong Kong Stock Connect, which may benefit from the inflow of foreign capital driven by the appreciation. As for the targets: 1. Recommend high-quality and high-dividend white goods leaders; 2. Recommend color TV leaders with increased market share and profit center; 3. Recommend robotic vacuum cleaner leaders leading globally; 4. Recommend companies with increased market share and active expansion. The main views of Guolian Minsheng Securities are as follows: Volume and Price: USD exchange rate elasticity is high From bottom to top, the export volume and price are the primary paths through which the exchange rate affects. During the appreciation phase, exporters may adjust the USD average price to maintain stability in the local currency ex-factory price, or absorb the appreciation impact in RMB prices. The former affects market share, and the latter affects profit. Looking back at past exchange rate cycles, the price elasticity of exported goods in USD is higher than RMB due to the cost advantage of the domestic supply chain. In the medium to long term, mirroring the appreciation of the Japanese Yen in the 70s and 80s weakened domestic cost competitiveness, improved overseas investment cost-effectiveness, reshaped the exchange rate-driven model, and shifted towards investment-driven capacity expansion overseas. Profit: Weak phase in foreign exchange margins Adjustments in the USD average price do not entirely offset the impact of exchange rate appreciation on foreign exchange profits. Looking back, 1. From 17Q4 to 18Q3, the gross profit margin of major companies' exports was generally weaker than domestic sales, with the margin of profit decrease for small home appliances exported higher than domestic products by about 1-5pct. 2. In 2021, the competition pace affected the domestic sales of air conditioners, with the profits of second-tier white goods and some small home appliance companies from foreign sales still weaker than domestic sales, with a 3-4pct higher decrease in profit relative to domestic sales. Overall, the appreciation of the exchange rate often accompanies periods of rising raw material costs, and price adjustments for exports are constrained by order cycles/negotiation capabilities, with margins generally weaker for exports than domestic sales. Foreign Exchange: Hedging to offset net asset losses Besides the gross profit margin, fluctuation in exchange rates results in differences in foreign currency net assets/liabilities, which are the main sources of exchange gains and losses in financial expenses; specifically, monetary net assets incur losses during appreciation, while net liabilities generate gains. In the past three rounds of RMB appreciation cycles, major companies in the household appliance sector mostly incurred losses from exchange rate fluctuations; based on the latest disclosure of foreign currency monetary items in H1 25, only HAIER SMARTHOME and Hisense Home Appliances Group are net debtors, benefitting from the appreciation exchange rate, while the remaining companies hold net assets. From an operating perspective, leading companies have a higher proportion of foreign exchange hedging, effectively offsetting the impact, with the actual impact more concentrated on small electrical companies exporting. Funds: Northbound investment inflows may boost In terms of funds, RMB appreciation boosts the value of foreign funds, contributing significantly to the northbound flows of A shares during past RMB appreciations. The household appliance sector ranks first in the industry of the Shanghai Stock Exchange Stock Connect program, with a relatively high shareholding ratio. Given the base of high existing stockholding, the elasticity of changes in foreign capital inflows is worth noting. The appreciation cycle that began at the end of 2016, supported by market styles, saw household appliance leaders outperform as representatives of consumption blue chips; in the 2020-2022 appreciation cycle, the sector outperformed in the first half, weakened in early 2021 due to the strengthening of the USD. At the current point, the sector's valuation is historically low, as are the rankings among industries, with the Hong Kong Stock Connect/mutual fund holdings remaining low, offering ample upside potential. Risk Warning: Unexpected rise in raw material costs, uncertainties related to tariffs and external demand.