China Furniture Sector 30 October 2018abc 2China Furniture SectorUBS Research THESIS MAP MOST FAVOREDLEAST FAVORED Oppein Suofeiya PIVOTAL QUESTIONS Q: Will intensifying competition lead to an industry-wide price warYes. We now expect further margin pressure in Q418 and 2019, particularly in the customizedwardrobe and premium segments, due to homogeneous competition and changing consumerperceptions. More promotions and investment in brand equity would be needed for leading brands todrive traffic growth, which could lead to further pressure on pricing and margins. more Q: Can China's custom-built furniture sector deliver double-digit growth in 2018-19E despitethe slowdown in the property marketLikely. We expect the rising penetration of custom furniture in tier 3-4 cities, product categoryexpansion and trading up to continue driving up sector value at a 10% CAGR in 2018-19 despite theslowdown in the property market.Outlook 2018: Cyclical headwinds but leaders could outperform on new products, consolidation 24 November 2017WHAT'S PRICED IN Oppein and Suofeiya are trading at 15x/13x 2019E PE, both at trough levels since listing. Though manynegatives are likely priced in after the c40% sell-off YTD, we expect the increase in promotional activitysince Q218 and downside risk to 2019 consensus EPS to weigh on the sector in the near term.moreUBS-S VIEWWe are turning cautious on the custom-built furniture sector, as we expect further marginpressure in Q418 and 2019, particularly in the customized wardrobe and premium segments. As weare turning cautious on the sector's near-term margin outlook and see 10-15% downside risk to 2018- 19 consensus EPS, we downgrade Suofeiya to Neutral but maintain our Buy rating on Oppein given itslower wardrobe exposure and limited margin risk. We prefer Oppein over Suofeiya due to the former'smore resilient EPS growth in 2019-20E (17% vs. 10%) and steady share gain supported by its balancedproduct lines.EVIDENCE1) 49% of respondents do not care about the brand as long as the product fits their needs, up 9pptfrom our 2017 survey, while the share of respondents who prefer branded products declined 8ppt YoYto 50%; 2) 23% of respondents said they would definitely pay more for the best brands, down 8pptfrom our 2017 survey; 3) total capex by listed companies increased sharply in 2017/H118, up 65%/29% YoY to Rmb4.6bn/Rmb3.0bn, while industry growth could slow to 10% in 2018-19 from thehigh teens in 2015-16.Figure 2: Total capex by listed customized furniturecompaniesFigure 3: Value growth of customized furniture industryto slow further in 2018-19E 。。。。。。