Summary
Haier Smart Home Co., Ltd. (6690.HK) is a global leader in smart home solutions and appliances, known for its innovative integration of IoT technology and a wide array of household products. With over a 32% stock price decline over the last two years, we believe the company is currently undervalued. This is considering that the stock’s slid has mainly been due to fear contagion over China’s property market crisis, which in reality has not directly affected the company’s fundamentals.
Part I: Haier Smart Home’s Resilience Amid China’s Property Market Crisis
Since 2020, China’s property market has faced a significant downturn, primarily due to high levels of developer debt, exemplified by the Evergrande crisis, and government regulatory measures aimed at cooling the overheated market. This downturn has led to a notable decline in new property sales and investments, impacting related sectors like construction, building materials, and home furnishing.
However, unlike other sectors, consumer electronics and home appliances experienced a more complex impact. While initially expected to decline in parallel with the property market, many companies in this sector, like Haier Smart Home, saw sustained or even increased demand. This resilience is attributed to the nature of the appliance market, which is driven by replacement needs and a trend towards consumption upgrades, rather than first-time purchases tied directly to new home sales.
This can be exemplified by comparing property sales and real estate investment in China, which fell drastically during 2022, with Haier’s revenue and net profit, which grew 7.2% and 12.5%, respectively, over the same period. [Pg. 5] Still, some companies in the same sector saw a decline in revenue and net profit, which highlights Haier’s strength and market dominance. Overall, this scenario fits a recurring pattern, which is mentioned by Benjamin Graham in his book The Intelligent Investor: “Everyone knows that speculative stock movements are carried too far in both directions, frequently in the general market and at all times in at least some of the individual issues. Furthermore, a common stock may be undervalued because of lack of interest or unjustified popular prejudice.”
Part II: Cheap Chinese Valuations for a Multinational Eminence
Haier’s global market share, particularly its presence in markets like North America in addition to China, offers several strategic advantages. Of particular relevance is that operating in multiple global markets allows the company to diversify its revenue streams, mitigating risks associated with economic downturns or market-specific challenges.
To represent the importance of the overseas market (and particularly the North American one) we can see that during 2022 Haier’s business in China amounted to RMB’M 126,359, almost the same as the smart home business overseas, which amounted to RMB’M 125,424. Of this, approximately 78% is attributable to the North American market. [Pg. 48]
This important participation of the North American market in Haier’s revenue stream is mainly due to its acquisition of GE Appliances in 2016. As IMD’s Professor Emeritus of Innovation Management William Fischer pointed out after the acquisition: “Owning the GE line of appliances and agreeing to partner with GE in a number of very interesting and future-oriented fields provides the potential to move Haier to a completely different stage of global expansion.” Years later, the potential has unveiled, with GE Appliances growing on double-digits since the acquisition, leading Haier to have the second largest market share (in terms of retail volume) for major home appliances in America in 2022, with a market share of 15.6%. [Pg. 38]
In essence, Haier’s successful development of its overseas business, which has been fueled by innovative strategic synergies amongst their self-developed businesses and the acquired ones, gives it an important competitive advantage. Moreover, there’s the opportunity to buy a company with growing presence in international markets, including the North American one, at the currently cheap Chinese valuations.
Fundamentals and Valuation
Over the last five years (2018 – 2022) revenue has gone from RMB’M 177,594 to RMB’M 243,485 (a CAGR of 9.45%), and net profit has gone from RMB’M 9,533 to RMB’M 14,732 (a CAGR of 9.67%). [Pg. 312] Moreover, in the first three quarters of 2023, the company achieved revenue of RMB’M 198,657 and net profit of RMB’M 13,149, representing growth of 7.5%, 12.7% and 13.4%, respectively, compared to the corresponding period of 2022. [Pg. 3]
The company also has solid free cash flow generating capabilities, with net cash inflow from operating activities in the first three quarters of 2023 amounting to RMB’M 13,203, an increase of RMB’M 1,952 compared to the corresponding period in 2022. [Pg. 6] And it has a reasonable level of liquidity with a current ratio of 1.1. In essence, we consider the company to have solid growth and a healthy balance sheet. Despite this, the company trades at an EV/EBITDA multiple of 7.69x and a P/E ratio of 11.44x. By comparison, the industry trades at an average EV/EBITDA multiple of 11.03x and a P/E ratio of 19.16x. This suggests a potential upside of 42%-67% if it were to trade in line with its peers.
Conclusion
Despite the challenges posed by China’s property market crisis, Haier has demonstrated remarkable resilience, showing minimal impact on its performance. However, the market seems to mistakenly value it as if it were directly tied to the housing industry due to its name and association, which is not the case. Throughout this challenging period, the company has consistently delivered strong results, underscoring its robustness. Moreover, it has achieved significant success abroad through well-executed expansion initiatives, becoming a household name in various markets. Overall, we believe the company is currently undervalued relative to its fundamental strength and multinational presence.
Disclaimer: This report represents our opinion and is not financial advice.
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