Decorated house ( 精裝房): Government has been pushing decoratedhouses in tier one cities. Property developers often choose well-renownedbrands when decorating the houses. This leads to market share gains forthe leaders.    For Gree and Midea: Midea gained significant market share in thisemerging decoration market. Midea’s Shanghai distributor indicated thatits orderbook from decorated house air conditioning (AC) systems grewover 100% YoY YTD. Gree is traditionally strong in the constructionchannel and has been pushing residential centralized AC.    Replacement demand: according to Nippon Paint’s distributor, Shanghai’scommercial housing market started to take off from 2001. The distributorsees robust redecoration demand that accounts for 20% of its revenue.    For Gree and Midea: tier 1 cities see good replacement demand, especiallyfor AC (as the previous major AC installation cycle started in 2009).    Product upgrade: Nippon Paint’s distributor indicated good popularity with“nontoxic paint” products (Formaldehyde- free, waterborne paints…etc.).    For Gree and Midea: smart AC (connected AC) is gaining good traction.    We expect more applications including fresh air purification and betterenergy efficiency to drive AC replacement demand.

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