Source: Guolian Securities, Author: Guan Quansen, Sun Shan
China's home appliance recycling has been incorporated into law since 2009, and the treatment catalog is mainly "four machines and one brain", and later expanded to water heaters, telephones, etc. Launched in 2012, the Waste Electrical and Electrical Disposal Fund was the core of the waste household appliance recycling policy system, which was essentially a transfer payment from producers to dismantling parties, and in recent years, the direct responsibility of producers has gradually replaced the fund as the dominant mechanism. In 2022, nearly 77 million air conditioners, refrigerators, washing machines and TVs will be dismantled, equivalent to 37% of domestic shipments.
At present, looking at the marginal changes in the recycling of household appliances, one is the fiscal and tax support under the background of trade-in, in addition to the special funds for the construction of commercial circulation at the county level, the scale of allocation of the waste electronic and electrical equipment treatment fund after the suspension of the levy has more than doubled compared with the collection level of previous years, reducing the capital threshold and accelerating the recycling of infrastructure; In 2022, leading manufacturers will participate in the recycling responsibility target system, and the participation mode of recycling links is different, Gree, TCL and Changhong have large-scale self-built dismantling capacity, and Haier's recycling plant will be put into operation in 2022.
In the near future, the trade-in policy is expected to be strengthened, and financial support is expected to lower the capital threshold for the construction of the recycling and dismantling system, optimize the recycling supply, and cooperate with the new standard guidelines to promote the release of rigid replacement demand and product upgrades.
1. The program is expanded, and the new measures are refined
On April 12, 14 departments including the Ministry of Commerce issued the "Action Plan for Promoting the Trade-in of Consumer Goods", emphasizing the establishment of a supply and demand mechanism to simplify the removal of old and boost the replacement of new ones, with the goal of increasing the recycling of waste household appliances by 15% by 2025 compared with 2023 and 30% by 2027 compared with 2023, with a corresponding CAGR of about 7%. Specific to the trade-in of home appliances, the incremental information can be summarized as follows:
In terms of finance and taxation, first, this round of policy cycle for the first time proposed to encourage local governments to use the relevant funds of the central financial modern commercial and trade circulation system to transform and upgrade the household appliance recycling network, and the central funds refer to the regular special transfer payment "service industry development funds", with a budget scale of 7.5 billion yuan in 2024, flat for 23 years, according to the 19 "Management Measures" The funds for the development of the service industry are mainly used for the construction of the commercial circulation system, and the special funds for the construction of provincial-level county-level commercial construction in the construction of trade and logistics in the sinking market are one of the important channels.
The second is to study and introduce relevant capital policies for the disposal of waste electrical and electronic products, in response to the draft of the "Measures for the Management of Special Funds for the Treatment of Waste Electrical and Electronic Products" issued at the end of March, the budget scale of the disposal fund supported by the central government will be 7.5 billion yuan in 2024, which is a significant increase from the previous collection volume of about 3 billion. In addition, supporting measures such as reverse invoicing and simplified taxation for resource recovery enterprises are proposed.
Consumption-related, the plan on the trade-in subsidy has not changed much, still to encourage qualified localities to give subsidies to consumers to buy green smart home appliances, support home appliance sales enterprises to jointly produce, recycle and carry out trade-in promotional activities, and encourage related financing. In terms of expression,"Local" and"Sales enterprises"are still the core subjects,Since March, home appliance retail channels and localities have responded to the central government,Trade-in-related policies and measures have been intensively implemented,Among them, Jingdong and its partners have invested a total of 6.5 billion in subsidies,Tmall proposed to improve the last mile logistics in districts and counties,Suning clarified the subsidy ratio of 10%;Shanghai has subsidy funds in various localities,Shanxi、Shandong、Chongqing and other provinces have issued provincial "implementation plans。 In addition, it is proposed to strengthen the leading role of energy efficiency and water efficiency standards and green intelligent certification, and respond to the "Action Plan for Upgrading Traction Equipment Renewal and Consumer Goods Trade-in with Standards" at the end of March, aiming to promote the release of renewal demand by revising the recommended standards for service life and developing segmentation/integration standards such as integration and low noise, and enhance the supply of standards for recycling and recycling.
Recycling-related, in response to the April 3 symposium emphasized "do a good job in the whole chain of product and equipment scrapping, recycling, remanufacturing, and resource utilization", the plan puts forward detailed requirements for recycling from three aspects: infrastructure, main body and service:
In terms of facilities, the construction of local recycling outlets and distribution centers was promoted, and specific measures such as convenience maps, temporary storage points in communities and classified recycling systems were mentioned.
In terms of the main body, it is proposed to cultivate new recycling models such as Internet + and car instead of storage, guide home appliance enterprises to rely on their own logistics system or entrust three parties to expand the home appliance recycling business, and promote the participation of recycling and platform enterprises;
In terms of service, we will implement after-sales service improvement actions to strengthen the integration of after-sales service and cooperation with recycling.
In addition, it is proposed to carry out a pilot project for the circulation of second-hand goods, encourage production and circulation enterprises to develop second-hand business, and encourage new models. As the infrastructure and supporting policies for the trade-in of household appliances, the construction of the household appliance recycling system has been repeatedly mentioned in previous documents and meetings: in March, the "Action Plan" gave a quantitative target of 30% growth in the total amount of recycling by 2027, and on April 3, the National Development and Reform Commission emphasized that it should do a good job in "scrapping, recycling, remanufacturing, and recycling" to form a closed loop. The boost elasticity of the financial subsidy for the old for the new has been fully discussed in the special topic "Household Appliances Trade-in Policy or Will Be Reincarnated", "From the Action Plan to See the Impact of Household Appliances "Trade-in", and the scale of renewal demand directed by the policy is also given in "Between Offense and Defense, Step Forward", and this topic tries to complete the puzzle of recycling links to understand how the policy promotes the release of renewal demand from the supply side, and the role of household appliance manufacturers here and the possible impact.
2. Looking to history, where are the home appliances recycled?
With the policy as a clue, the household appliance recycling was incorporated into the law in 2009 in the "Regulations on the Recycling and Disposal of Waste Electrical and Electronic Products", and the policy framework with product catalogs, treatment funds and qualification licenses as the core was established. In June of the same year, the "Implementation Measures for Trade-in" encouraged the recycling of waste household appliances through sales channels in the form of subsidies, and at the same time provided freight subsidies to third-party household appliance recycling enterprises involved in recycling and dismantling; in 2010, air, ice, washing, TV and microcomputer "four machines and one brain" were included in the first batch of "Treatment Catalogue", and in 2014, water heaters, telephones and office equipment were added, expanding to 14 categories; in 2012, the waste electronic and electrical treatment fund was levied, which is essentially from the production, The amount of transfer payments from importers to dismantling enterprises was adjusted twice in 2016 and 2021. In 2016, the producer responsibility system came to the fore with the state-run plan, and in 2022, enterprises will pilot quantification, and the direct responsibility of manufacturers will gradually replace the fund as the center of the system.
From the perspective of scale, according to the model of the Household Appliances Research Institute, the theoretical scrap volume of refrigerators, washing machines, air conditioners and TVs in China in 2022 will be 4673, 3921, 5085 and 72.01 million units, respectively, equivalent to 96%, 113%, 60% and 176% of the scale of domestic sales and shipments in that year. Considering the actual recycling rate, in 2022, the standardized dismantling volume of refrigerators, washing machines, air conditioners, and TVs will be 1,605, 1,793, 1,051, and 32.43 million units, respectively, equivalent to 39%, 44%, 12%, and 79% of the domestic sales scale, which can be understood as the "terminal recycling volume" in the industrial chain. In the past 22 months, the average recycling prices of ice, washing, air and TV were 154, 114, 268 and 72 yuan per unit respectively, so it is estimated that the scale of the recycling industry of the four major categories is between 2 billion and 3 billion, and the total is expected to exceed 10 billion.
The diseconomies of scale brought about by strong service attributes, as well as the high operating costs of formal dismantling under regulatory constraints, make a large number of informal channels flowing to "private demolition" dominate the recycling of household appliances: in 2018, the air conditioner with the highest proportion of non-individual recycling still accounted for 87% Compared with the total amount of waste electrical and electronic equipment recycled by the Ministry of Commerce, the Ministry of Ecology and Environment (MEE) accounts for less than 50% of the total amount of formal dismantling covered by funds. In terms of formal channels, in 2022, the six leading home appliance manufacturers participating in the recycling responsibility system of production enterprises will have a total recycling target of 16.96 million units, accounting for 22% of the total formal dismantling of the year.
Compared with the recycling with strong gray economic color, the downstream dismantling has a higher degree of industrialization. According to the statistics of the Household Appliances Research Institute, by 2015, five batches of audit qualifications were finalized, and among the 109 enterprises with formal dismantling qualifications for household appliances, home appliance manufacturers accounted for only 7%, and 55% were professional renewable resources/environmental protection industry enterprises. According to the China Re-Association, in 2022, the top six enterprise groups in terms of treatment capacity are only Gree, TCL, and Changhong, and the annual processing capacity of the head re-investment ring is about 17 million units, accounting for about 23% of the total industry.
Taking listed companies as a sample, affected by the business scope and model, the survival status of dismantling enterprises is different: the business model of the leading company is the most comparable with that of home appliance manufacturers, and the gross profit margin level is significantly affected by the reduction of subsidies and the epidemic, which is around 20% in the past two years; GEM, which handles solid waste products covering batteries, automobiles and metals, has a gross profit margin in the range of 10%-15%; and the gross profit margin of the urban development environment, which is dominated by 2G projects in the "Build-Operate-Transfer (BOT)" model, is high, and the Tus-Environment model is similar. In terms of recycling, the compound growth rate of US dollar revenue of the leading Internet platform ATRenew has reached 30% in the past five years, and the operating loss ratio has narrowed to 1% with the expansion of GMV and the increase of charging rate.
At present, the marginal changes in the recycling of household appliances are that the waste electronic and electrical equipment treatment fund, which has played an important source of funds for formal dismantling for many years, will be suspended from 2024 and transferred from the central general financial budget through a special fund, of which 30% will be allocated to refrigerators and air conditioners, 10% for washing machines and TVs, and each place will be distributed according to the factor-weighted "substitution with awards". The 2024 central special budget of 7.5 billion yuan for the treatment of waste electrical and electronic equipment will eliminate the payment burden of producers and importers, which may have a positive impact on profits, and on the other hand, the allocated budget will more than double the collection level of less than 3 billion yuan in the previous year, which will directly promote the construction of recycling and dismantling infrastructure. Referring to the academic conclusions, among the main factors affecting consumers' willingness to recycle waste household appliances, whether they can recycle at home and the frequency of door-to-door service by recycling personnel have the greatest impact1.
The second change is the implementation of the first phase of the producer recycling responsibility target system in 2022, and the responsibility of manufacturers will move to the center of the system. In the recycling process, Gree and Changhong mainly build their own and carry out recycling through the original platforms, stores and service channels, Midea has agreed to build points with local distribution centers, while Haier mainly relies on the socialized recycling system to cooperate with professional recyclers; in the dismantling process, Gree operates 6 renewable resource bases across the country with its wholly-owned subsidiaries as the main body, with a dismantling volume of 6.7 million units in 2022; TCL Industry operates 6 dismantling bases through TCL Environmental Protection Technology, an environmental protection business platform, with an annual processing capacity of 469 electrical and electronic products 10,000 units, Changhong Gerun was listed on the New Third Board, covering recycling and dismantling, with an annual processing capacity of about 2 million units, and Haier's recycling plant with an annual dismantling capacity of 2 million units was also put into operation in September 2022. In November 2023, the second batch of recycling responsibility target system applications will be completed, and the number of participating manufacturers will increase to 8, with a total of more than 20 million units2.
3. Looking through the lens of Japan, what is the future of industrialization?
Overseas, Japan, where local resources are scarce, is a pioneer in waste recycling, with the Waste Disposal Act enacted in 1970 to establish a general waste treatment system, the Basic Law on Promoting the Construction of a Recycling-Oriented Society in 2000 was the first regulation to promote the construction of a recycling system in addition to treatment, and the Home Appliance Recycling Act was implemented in 2001, establishing residents, channels and production for four types of household appliances: air conditioners, refrigerators and freezers, washers, dryers and televisions. The Small Household Appliances Recycling Law, which was implemented in 2013, expands the scope of recycling to small household appliances, but the parties involved and manage them are not in the same system as major appliances. In fiscal year 2021, as of April 2022, the total number of four major appliances in Japan was slightly more than 15 million units, equivalent to 68% of the shipments in the same period, of which the proportion of ice washing and TV has reached about 90%, and the proportion of air conditioners is low, and the total recycling CAGR from 2018 to 2022 is about 4.7%.
Under the framework of the Household Appliance Recycling Act, the rights and responsibilities of home appliance recycling in Japan are clearly divided: consumers bear the cost of recycling logistics and dismantling and disposal, retail terminals are responsible for the collection of waste appliances and logistics for the collection and distribution center designated by manufacturers, and manufacturers/importers are mainly responsible for dismantling and converting waste products into reusable parts or raw materials, subject to the statutory "recommoditization rate" target. In the past 20 years of the framework's operation, driven by policy encouragement and efficiency improvement, the recycling fees charged to consumers have been reduced several times, among which the frequency of air conditioners with low recycling rate has been the largest.
In essence, although there is a mature operation system for home appliance recycling in Japan, it is more of a social responsibility sharing rather than an industrial chain concept, and consumers share costs with channels and manufacturers to fulfill legal obligations, and there is no mature and clear business model.
In terms of the dismantling and processing links in which manufacturers participate, in order to share the fixed costs of dismantling factories and the intensive utilization of logistics distribution, Japanese home appliance manufacturers have been divided into two groups A and B since the beginning of the implementation of the recycling law, of which Group A is led by Panasonic, Daikin, and Toshiba, which mainly uses existing recycling and dismantling capacity to minimize capital expenditure; Group B, led by Mitsubishi, Hitachi, and Chatrap, is dominated by Sony, and focuses on new processing capacity, emphasizing high commercialization rate and circulation efficiency. As of July 2023, there are 18 companies in both groups, with a smaller number of participants by enterprise group, and a total of 107 other home appliance manufacturers and some importers have delegated their recycling business to 36 recycling companies as required by law. According to a survey by the Ministry of Trade and Industry, in fiscal 2021, the top 7 group companies with the highest collection fee income accounted for more than 85% of the total recycling volume, and CR3 was close to 60%, which is highly concentrated. It is worth mentioning that even in Group A, which mainly relies on existing production capacity, many of the leading groups have self-built recycling capacity, such as Panasonic's Eco-Technology Center, which undertakes the role of research and development of reuse technology and improvement of recycling process to increase the recommoditization rate in addition to dismantling, and the overall management of recycling business is generally entrusted to third-party agreements.
The average survey in FY2021 is about 2,500 yen/unit, and the sales revenue of re-commercialized parts/materials in the factory is not completely in the manufacturer's body, and the attribution is relatively complex, so it is not included for the time being, and the majority of the cost is in the dismantling factory, which accounts for 55%-60% of the collection fee revenue, followed by the collection and logistics costs, accounting for 30% of the collection fee Again, it is the operating expenses of the manufacturer itself and the entrusted management company, accounting for 10%-15% of the collection fee, which varies greatly between manufacturers. After deducting the above costs and expenses, the net profit margin of the recycling business of the top manufacturers in FY2021 excluding recommoditization was mostly LSD, and the leading enterprises were close to 4%, and referring to the estimated sales of reused resources per unit disclosed by the Ministry of Industry and Industry in 2008, if the recommoditization revenue of the factory is fully included in the table, the profit margin of the recycling business of the leading manufacturers can reach double digits.
4. Maintain the "outperform" rating of the sector
On April 12, the Ministry of Commerce and 14 other departments issued the "Action Plan for Promoting the Trade-in of Consumer Goods", compared with the "Action Plan for Promoting Large-scale Equipment Renewal and Consumer Goods Trade-in" issued by the State Council in mid-March, the incremental information focused on the refinement of the fiscal and taxation mechanism and the construction of the waste household appliance recycling system, and gave policy directions on infrastructure, subjects and services in terms of recycling. Since 2009, the recycling and treatment of household appliances in mainland China has been introduced into the law, and the gray channels of the current recycling process are still dominant, and the dismantling industry is dominated by professional leaders in solid waste treatment, and in 2022, leading manufacturers will participate in the quantitative pilot of producers' recycling targets, and the current recycling and dismantling are all involved, with different models. Looking at the industrialization process of waste household appliance recycling in Japan, the role of leading manufacturers cannot be underestimated, and the system cost is often optimized with the large-scale dilution of fixed items and the improvement of operational efficiency and cost reduction. Financial support is expected to lower the capital threshold for the construction of recycling and dismantling system, optimize recycling supply, and promote the release of rigid replacement demand.
Finally, to reiterate the industry's view, since 2024, the business performance of home appliances has been better than expected, domestic demand has been steady and improving, and export sales in March are still resilient under the high base, and brands have contributed to the increase in overseas contributions. In terms of policy, the renewal is the leading stage, and the stimulus is flexible, although it cannot be compared with the stage of household appliances going to the countryside, but the icing on the cake can be expected. On the whole, the first quarterly report of the sector is expected to be more optimistic, the dividend yield and valuation still have relative advantages, and the policy is catalyzed, so it is recommended to actively layout. We continue to recommend: 1) high-quality high-dividend representatives, such as white power leaders Midea Group, Haier Smart Home, Hisense Home Appliances, and Gree Electric Appliances; 2) Strong α kitchen faucets, Vantage and Robam Appliances, whose share and average price have steadily increased; 3) Hisense Video and Roborock, which have reshaped the global pattern and lead the performance of the market, and 4) Pro-cyclical representatives of Xiaoxiong Electric, Xinbao and Ecovacs, whose business inflection point is gradually approaching.
5. Potential Risk Warning
1. The policy is not as good as expected: the current policy expectations contained in the stock price are not high, if the subsequent stock price continues to rise sharply, the expectation is too high, and the final policy is likely to be weaker than market expectations.
2. Rising raw material costs: The performance of household appliances is generally stable, but due to the relatively high proportion of bulk commodities in their costs, if the prices of bulk commodities such as steel, copper and plastic continue to rise sharply, corporate profits will be dragged down.
3. Significant accumulation of air-conditioning inventory: In the current demand environment, if industrial shipments continue to maintain a rapid growth trend in 2024, it is expected that there will be a significant upward risk of channel inventory, which will drag down subsequent industrial shipments and prices.
4. Large fluctuations in foreign capital: the proportion of foreign capital holdings in household appliances is relatively high, and it has been greatly affected by the flow of foreign capital in the past year.