The Zhitong Finance App learned that SDIC Securities released a research report saying that the country has introduced policies to strengthen support for large-scale equipment upgrades and consumer goods trade-in. The team believes that the home appliance stimulus policy is expected to boost sales of home appliances and increase orders from upstream parts companies; at the same time, the policy provides greater subsidies for energy-efficient products, which is expected to drive upstream enterprises to upgrade their product structure. Among them, the electronic expansion valve has better regulation and energy saving performance, and is a key component for improving the energy efficiency of air conditioners. Therefore, SDIC Securities believes that the current home appliance stimulus policy is expected to drive a rapid increase in sales of electronic expansion valves and boost sales of upstream parts companies.

Incident: On July 25, the National Development and Reform Commission and the Ministry of Finance issued “Certain Measures to Strengthen Support for Large-scale Equipment Renewal and Consumer Goods Trade-In” (hereinafter referred to as “Measures”), which co-ordinated funding for ultra-long-term special treasury bonds of around 300 billion yuan to increase support for large-scale equipment renewal and consumer goods trade-in.

The central financial administration is strongly supporting this trade-in subsidy campaign: According to the “Measures”, the National Development and Reform Commission directly allocated about 150 billion yuan of ultra-long-term special treasury bond funds to the local authorities to implement the support policies listed in six of them, including products such as home appliances and automobiles. Funding to support the trade-in of products such as home appliances and automobiles is shared between the central and local authorities in accordance with the overall 9:1. Assuming an equal distribution of funds, it is expected that the central and local governments will pay for household appliances

The trade-in support fund is approximately 27.8 billion yuan (calculation method: 1500 ÷ 6 × 109 = 278). The central financial administration is strongly supporting this trade-in subsidy campaign, which is expected to effectively stimulate the release of demand for home appliance renewal.

The current policy is more heavily subsidized for energy-efficient household appliances: the “Measures” suggest that individual consumers will be given a 15% subsidy of the sales price of the product to purchase 8 types of household appliances such as refrigerators, washing machines, televisions, air conditioners, computers, water heaters, household stoves, and range hoods with energy efficiency standards of level 2 or above; an additional 5% subsidy of the sales price will be given to the purchase of products with energy efficiency or water efficiency standards of level 1 or above. Each consumer can subsidize 1 item of each type of product, and the subsidy for each item is no more than 2,000 yuan. Compared with China's policy of going to rural areas and trade-in from 2007 to 2010, the current trade-in policy provides greater subsidies for energy-efficient household appliances. SDIC Securities believes that this policy will promote the upgrading of the product structure of the home appliance industry and drive an increase in the average price of household appliances. Leading household appliances account for a relatively high share of sales, and have R&D, production and product advantages, and will benefit more from the subsidy policy.

Implement a financial support policy for the recycling and disposal of waste electrical and electronic products to promote the healthy development of the industry: The “Measures” state that in 2024, the central financial administration will arrange 7.5 billion yuan to continue to support the recycling and treatment of waste electrical and electronic products through “rewards in lieu of compensation”, and to support the recycling and disposal of waste electrical and electronic products in installments after verification. As SDIC Securities stated in the special report “Increasing Funding Support for Recycling and Dismantling to Benefit Home Appliance Renewal Needs”: On the one hand, central financial resources will gradually make up fund receivable subsidies from dismantling and processing enterprises, ease financial pressure, and increase willingness to dismantle. On the other hand, central financial resources are expected to gradually resolve past shortcomings in the recycling and dismantling industry, improve the convenience of recycling household appliances, stimulate consumers to get rid of used household appliances, and help implement trade-in policies more effectively.

Upstream parts companies are expected to benefit from the trade-in policy: on the one hand, the home appliance stimulus policy is expected to boost sales of home appliances and increase orders from upstream parts companies. On the other hand, the policy provides greater subsidies for energy-efficient products, which is expected to drive upstream enterprises to upgrade their product structure. The electronic expansion valve has better regulation and energy saving performance, and is a key component for improving the energy efficiency of air conditioners. SDIC Securities believes that the current home appliance stimulus policy is expected to drive a rapid increase in sales of electronic expansion valves and boost sales of upstream parts companies.

The potential renewal demand for home appliances is huge, and the policy will accelerate the release of demand: in the three years of the pandemic, household appliances have accumulated a large amount of demand that needs to be updated but not updated, and there is also a larger demand for home appliances to be updated from 2024 to 2026. Therefore, the trade-in subsidy policy will stimulate the accelerated release of demand for home appliance renewal. SDIC Securities conducted a sensitivity test on the sales volume of home appliances driven by the subsidy policy (see the special report “How does the trade-in policy affect the consumption of home appliances?”). Under a neutral assumption, 20 billion yuan of subsidy funding is expected to drive the year-on-year growth rate of air conditioners/refrigerators/washers/color TVs to -2%/+38%/+26%/+4% in 2024, increasing by 8 pct/47 pct/20 pct/10 pct, respectively, compared to the unsubsidized scenario (see Table 2). The total domestic sales growth rate of the four major categories of air ice washing color TVs is expected to increase to 12%. The subsidy policy will drive the growth rate to increase by 18 pcts, and the trade-in subsidy policy is expected to clearly boost the sales volume of major TVs.

Investment suggestions: The current trade-in policy is more funded by the central government, and the implementation effect of the policy may be better. It is expected to drive the centralized release of demand for home appliance renewal; the current policy provides stronger subsidies for high-energy efficiency household appliances, which will promote the upgrading of the product structure of the home appliance industry. Leading home appliance companies account for a higher share of sales of energy-efficient products and are expected to benefit more from the policy. SDIC Securities recommended home appliance leaders Midea Group, Haier Smart Home, Gree Electric, Hisense Video, Hisense Home Appliances, Boss Electric, and Vantage Co., Ltd. Increased sales of household appliances are expected to drive an increase in orders for upstream parts, and components such as electronic expansion valves related to energy-efficient products will benefit. We recommend Sanhua Intelligent Control and Dunan Environment, the leading home appliance components.

Risk warning: Policy implementation results fall short of expectations, sharp rise in raw material prices, risk of real estate policy changes, sharp appreciation of RMB, risk of falling short of expectations in estimates and assumptions.