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Slowing home sales hitting China's home-appliance stocks
VALUATIONS on once-sizzling Chinese home-appliance stocks have come down to levels that may interest some investors, though that's unlikely to drive a rebound due to the long shadow the slowing property market casts over the sector.
The fortunes of companies that make air conditioners, freezers and other household appliances are closely tied to property sales.
The likes of Qingdao Haier and Gree Electric Appliances saw their shares surge over the past couple of years as China's housing market boomed, only to fall off the rails in 2018 as the government tightened controls to ward off a crash.
The outlook for developers remains gloomy, which is bad news for appliance makers.
"The low valuations reflect investors' pessimistic expectations over home sales as some consumer discretionary names are closely tied with the property market," said Wang Chen, Shanghai-based partner with XuFunds Investment Management.
"That kind of pessimism may persist over the next two to three years, weighing on appliance stocks."
Gree and Qingdao Haier had been out of favour despite trading near the cheapest in more than 19 months, while Midea Group has lost US$24 billion in value since hitting a record high in late-January.
Household goods account for about half the weighting of a gauge of consumer discretionary stocks on the CSI 300 Index that has dropped 16 per cent in three months, more than three times the benchmark's slide.
"They're mainly dragged by the bearish outlook for the property industry," said Shen Li, an analyst with Bloomberg Intelligence in Hong Kong.
"The sector had abnormally fast growth in the past year or so along with China's real estate sales, and that's not sustainable."
Signs of a housing slowdown have surfaced as government curbs and tighter credit conditions dent buyers' confidence. New-home sales grew at the slowest pace in four months in August, Bloomberg calculations based on official data showed.
Other evidence of weakness include falling sales in small cities, and developers offering discounts and even luxury cars to attract customers.
A recent survey by Standard Chartered showed developers' sentiment at the lowest in eight years in August.
Appliance-makers aren't alone. China's equity market as a whole has had one of its roughest years in recent memory, losing US$2.5 trillion since late January as the government tried to rein in leverage and trade tensions with the US worsened.
Beijing has responded to American tariffs with some levies of its own, while also planning to increase spending on areas such as infrastructure to cushion the economic blow.
"China has made clear that it will crack down on property speculation, and it's even more unlikely to ease the curbs now it's embroiled in a trade war," said Dai Ming, a Shanghai-based fund manager with Hengsheng Asset Management. "Investors will only rest easy when everything including the property market is settled, and that's when the sectors impacted will finally stabilise."
Consumer stocks had a strong start on Friday after China's Cabinet unveiled guidelines to boost domestic consumption.
This may benefit high-priced consumer products like cars more than low-priced appliances, Mr Dai said. The unpromising outlook for appliance shares remains intact given property curbs.
The turn of events in recent months make the two years through late January a distant memory. In that period, Midea surged 260 per cent in Shenzhen, while Gree rose 209 per cent and Qingdao Haier more than doubled.
"People got concerned about expensive valuations and the sustainability of profit growth and started to escape from the peak," said Ken Chen, an analyst with KGI Securities, also based in Shanghai.
After the subsequent slide, Gree is trading at nine times earnings, compared with a 10-year average of more than 11 times, while Qingdao Haier also trades below its 10-year average and Midea is roughly on par.
"The declines may not be over just yet - the big consumption environment doesn't look so prosperous," Mr Chen added. "While expensive valuations led to the sell-off in the short term, the key concern remains over the companies' ability to maintain high profit growth." BLOOMBERG