Sinolink: How to view investment opportunities in white goods at this current time?

Sinolink released a research report stating that the current white goods sector is in a resonance stage with fundamentals bottoming out, marginal easing of cost pressures, and institutional positions at historically low levels. There is a foundation for performance restoration and valuation recovery in the second half of the year. In the long term, growth in overseas markets and improved shareholder returns are expected to drive the sector's valuation system from mature manufacturing to high-quality cash flow + enhanced shareholder returns + stable growth. Considering the low valuation, high dividend, and stable cash flow attributes, the bank is optimistic about investment opportunities in the white goods industry in the second half of the year, maintaining an "Overweight" rating on the sector. Sinolink's main points are as follows: Fundamentals: Base pressure eases, and the direction of recovery in the second half of the year is relatively clear. In the first half of 2026, retail sales of home appliances saw a year-on-year decline of 9.5%, mainly due to the high base formed by national subsidies in the first half of 2025. Entering the second half of the year, base pressure has significantly eased. Based on the average share of retail sales in the first and second halves of home appliances being 45%/55% since 2020, the bank estimates that retail sales of home appliances in the second half of 2026 will reach approximately 600 billion yuan, a year-on-year increase of 7.7%. Among these, Q3 and Q4 are expected to decline by 2.8% and grow by 18.2% year-on-year, respectively, indicating a trend of narrowing declines in Q3 and significant restoration in Q4. By category, it is expected that domestic sales of air conditioners and refrigerators will grow by 7.4% and 2.2% respectively in the second half, while domestic sales of washing machines are expected to decrease by 1.1%, with the decline further narrowing. External sales of air conditioners are expected to significantly recover as the base declines, while refrigerators and washing machines will continue to grow, with expected increases of 11.1%, 3.3%, and 4.1%, respectively. Commodity Impact: Year-on-year growth rates of copper and aluminum prices may have peaked, and profit pressure is expected to gradually ease. In the second quarter of 2026, the average prices of copper and aluminum increased year-on-year by 40.0% and 45.9%, respectively, marking a concentrated phase of pressure from commodity prices and an important pressure test window for the performance of leading white goods companies. From the current trend, the month-on-month increase in copper prices has clearly slowed, and aluminum prices have fallen to around $3,200 per ton since July, approaching the average price in Q1 of 2026. The bank conducted scenario assessments on the price increases of copper and aluminum, and under most price assumptions, the year-on-year growth rates in the second half of the year will fall compared to the first half. Historically, leading companies can effectively hedge cost fluctuations through price increases, cost reductions, and production adjustments, suggesting that the marginal drag of raw material prices on profits is expected to weaken quarter by quarter. Chip and Valuation: Institutional positions are at historical lows, and a stabilization in fundamentals is likely to lead to position replenishment. As of the end of Q2 2026, the proportion of public fund holdings in the home appliance industry is 1.02%, a decrease of 0.6 percentage points quarter-on-quarter, the lowest level since 2015, reflecting relatively sufficient coverage of weakened demand and rising cost pessimism. As fundamentals gradually stabilize and market styles trend towards balance, leading white goods companies, characterized by low valuation, high dividends, and stable performance, are expected to see position replenishment. Furthermore, the "Guidelines for Asset-Liability Management of Insurance Companies" will be implemented in 2027, stipulating that the net investment income coverage ratio for life insurance must not be lower than 100%. Given that net investment income mainly comes from stable cash sources such as interest, dividends, and rent, the configuration value of high-dividend assets is further enhanced against the backdrop of declining long-term interest rates and pressure on bond coupon rates. Leading companies in the white goods sector, with strong dividend capabilities and low valuations, are expected to benefit from increased allocations by insurance funds and public fund position replenishment, bringing additional funds to the sector. In the long term, mature consumer companies enhance shareholder returns through dividends and buybacks, helping to strengthen valuation support. Taking Coca-Cola as an example, from 2013 to 2025, the company's revenue and profit have a compound annual growth rate of -0.3% and 2.6%, respectively, during which the company consistently increased dividends and implemented buybacks, leading its PE forward average from 17.4 times to 21.8 times. The shareholder returns of leading domestic white goods companies are also continuously improving: in 2025, Midea's dividend payout ratio is expected to increase to 73%, and it announced a buyback plan of 6.5 to 13 billion yuan in 2026; Haier announced dividend payout ratios of no less than 58%, 60%, and 60% for 2026 to 2028, respectively. Leading companies in the white goods sector have ample cash flow, and controllable capital expenditure intensity, making it likely for their enhanced shareholder returns to drive the market to re-evaluate their long-term value. Growth Outlook: Overseas markets, represented by Europe, are expected to become an important incremental source for the air conditioning category. By 2025, the penetration rate of air conditioners in European households is only about 23%, and the frequency and intensity of high-temperature weather have been steadily rising in recent years, enhancing the necessity for air conditioning consumption. By 2025, China's exports of air conditioners to Europe are expected to reach 17.23 million units, representing a compound growth of 9.9% from 10.73 million units in 2020. Chinese brands such as Haier, Gree, Midea, and Hisense have already captured over 60% of the share in Eastern Europe, while their share in Western Europe remains below 20%, creating a dual opportunity for improvement with low penetration and brand share. The bank estimates that under scenarios where European air conditioning penetration rates reach 40%, 50%, and 60%, stable annual sales could reach approximately 19.8 million, 24.69 million, and 30.48 million units, respectively. Leading Chinese companies are expected to enter a phase of market share growth by continuously improving their product, channel, and brand layouts. Risk Warning Recovery in end-user demand may be less than expected; raw material prices such as copper and aluminum may rise beyond expectations; intensified price competition in the industry; substantial fluctuations in overseas tariff policies and exchange rates; faster-than-expected withdrawal of support policies such as national subsidies.