China home appliance makers poised for strong growth on wage rises, urbanisation

HONG KONG Thu May 22, 2014 3:12am EDT

HONG KONG May 22 (Reuters) - Chinese home appliance makers like Qingdao Haier Co Ltd and Midea Group are on track to deliver stellar growth this year thanks to rising wages and the country's urbanisation drive.

Appliance manufacturers are expected to outshine China's home appliance retailers as they are largely immune to the fiercely competitive online market, unlike companies such as GOME Electrical Appliances Holding Ltd and Suning Commerce Group Co Ltd, which have struggled with e-commerce initiatives.

The country's home appliances market is expected to reach 738.1 billion yuan ($118.40 billion) by 2016 in terms of retail value, up from an estimated 603.5 billion yuan this year and 547.5 billion yuan in 2013, according to data from consumer research firm Euromonitor.

"There is a bit of concern that the property slowdown (will affect) sales of home appliances, but I think the replacement demand is still very strong," said Kelvin Wong, an equity research analyst at Julius Baer in Hong Kong.

China's consumer discretionary sector, which also includes Wuxi Little Swan Co Ltd and Gree Electric Appliances Inc of Zhuhai, is expected to see overall profit grow 42 percent this year to a four-year high and up from 26 percent growth last year.

Rising wages across China have spurred a growing middle class eager to improve their quality of life in line with Beijing's push to shift to a consumer-driven economy from one more reliant on exports.

The latest batch of earnings from home appliance makers show strong growth so far this year, with Qingdao Haier, a unit of the world's largest appliances maker, Haier Group, posting a 20.3 percent year on year rise in first-quarter net profit to 867.5 million yuan.

Mainland rival Midea Group said its net profit for the first quarter surged 148.5 percent to 2.54 billion yuan, with analysts expecting its full-year earnings to rise 77.5 percent, the fastest pace since the group listed in 2013.

Wuxi Little Swan and Gree Electric also posted first-quarter profit growth of more than 50 percent. Little Swan's 2014 profit is expected to grow by 36.7 percent, the strongest since 2010, while Gree's is forecast to rise 22.4 percent, according to analysts.

RETAILERS BATTLE ONLINE

While the outlook for home appliance makers is positive, the outlook for retailers is overshadowed by the fiercely competitive online market.

GOME Electrical Appliances, which is backed by private equity fund Bain Capital, is expanding its business to online retailing from traditional stores. It said this week first-quarter profit surged 252.6 percent to 268 million yuan.

Analysts expect GOME's e-commerce net loss to narrow this year compared to an e-commerce net loss of 540 million yuan in 2013.

Its larger rival, Suning Commerce Group, China's top home appliance retailer by market value, reported a 433.5 million yuan loss for the first quarter, against a 492.8 million yuan profit a year earlier. Its e-commerce sales fell 26.7 percent to 3.3 billion yuan.

The benefits for companies who get their online strategy right are clear.

E-commerce transactions in China are projected to hit $540 billion by 2015, or approximately 10 percent of total retail transactions, according to KPMG's global China practice.

"I've bought almost all the things you can think of online. I just bought a toaster from Taobao last month," said Cherie Zhang, an administrative assistant for an education institute in Shanghai, referring to the Alibaba-owned online shopping site similar to eBay.

($1 = 6.2337 Chinese yuan) (Additional reporting by Donny Kwok in HONG KONG and Patturaja Murugaboopathy in BANGALORE; Editing by Anne Marie Roantree and Matt Driskill)

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