As of Dec. 26, 2017, the overall home and appliance sector rose by 44.76%,ranking the second among 28 industries. The air conditioner segment saw thestrongest performance (up 92.28%), followed by washing machine andrefrigerator segments (up 63.45% and 56.33% respectively). In terms ofstocks, the top four gainers are LITTLE SWAN (000418.SZ), MIDEA GROUP(000333.SZ), HAIER (600690.SH) and GREE (000651.SZ), with an increase of110.3%, 105.7%, 96.7% and 90%, respectively. The rise in price was mainlydriven by growing profitability. From 2H2016 to 3Q2017, the home appliancesector maintained steady growth both in revenue and profit.    China’s small home appliances ownership and penetration rate is significantlylower than other countries, presenting large room for growth. For the TV,refrigerator, washing machine and air-conditioning appliances, there used tobe rapid expansion in urban areas and have entered a stage of steady growth.    Nowadays, rural market penetration rate is increasing rapidly. As for theupdate demand, the traditional four categories of home appliances were higherdemand for replacement. There is usually a 7-11 years replacement cycle forhome appliance. From 2006 to 2010, it was the peak time for home appliancepurchase. We expect steady growth for update demand in 2018. Meanwhile,high-end manufacturing products are replacing foreign brands.    We think the three segments may continue to be the driving force of the sector.    First, the trend of consumption upgrade will continue to benefit the homeappliance sector. With the increasing preference for smart high-end appliance,both the white appliance and kitchen appliance enterprises will see increasedprofitability thanks to price premium. Secondly, on the demand sidestandpoint, small appliance segment has greater market potential primarilyreflected in new demand. In respect of traditional home appliances, we expectthe sales growth of air conditioners to fall to below 15% by 2018, and thegrowth of refrigerators and washing machines will continue.    The fundamentals are to be considered first and foremost in makinginvestment decisions. With the trend of consumption upgrade and improvedproducts structure, we think opportunities exist for leading companies withhigh R&D capacity and small appliance names listed in A-share market. Due toits late start, the small appliance segment is highly differentiated. With thecontinuous improvement of market concentration, the advantages of the wellperformingleading stocks will continue to show. Recommended companiesinclude MIDEA GROUP (000333.SZ), HAIER (600690.SH), TCL (000100.SZ),HXDQ (600060.SH), ROBAM APPLIANCES (002508.SZ) LITTLE SWAN(000418.SZ) and KINGCLEAN (603355.SH)

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