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Smart home sector preview

Chinese household appliance manufacturers are looking at European and US targets in the home space sector including intelligent & green household appliances, in-home robotics appliances, high-tech based interactive platforms or ecosystems. Simultaneously, Chinese buyers from other sectors are also looking to diversify into the smart home space via M&A opportunities in Europe and the US. 

Acquisitions for internationalization

Chinese smart home sector players are looking to internationalize their operations via acquisitions to benefit from the higher degree of modernization in Europe and the US and a wide customer base. Through acquisitions, Chinese smart home space companies have extended sales channels and increased presences in over 100 countries, primarily in the US, Europe, Japan, Australia, New Zealand, and Southeast Asia. At the same time,being highly reliant on exports, the sector players are starting to analyze global market demand during the post-pandemic period to stay competitive.

Eager to move closer to its clients in other parts of the world, top Chinese home appliances maker Skyworth Group plans to ramp up its overseas expansion this year with a focus on India, Southeast Asia, Europe and Africa.

Whole series appliances manufacturer Midea Group and Chinese home appliance giant Haier Smart Home were reported as potential buyers for the appliance unit of Koninklijke Philips’, according to Mergermarket intelligence. The Dutch company announced that it is planning to launch the divestment process after this summer, Mergermarket reported in May. The unit generated revenue of USD 2.3bn for 2019.

Valuation gap

Mergermarket database recorded an average EV/EBITDA multiple of 12.1x targeting the European companies in the sector in 2019.

The number of 12.1x was 44.6% lower than the EV/EBITDA multiple of 17.5x from the selected ten Chinese companies in the smart home spaces, according to their 2019 financials. Those ten Chinese companies have shown interest to increase investments for overseas operations. Such gap in valuation indicates that European companies in the sector are valued at a relatively lower basis than their peers in China.

However, considering the current macroeconomic conditions, rising costs, and regulatory changes, the uncertainties remain on cross border M&A in the sector.

Accelerated post-pandemic recovery and transformation

The domestic consumer market has started showing signs of post-pandemic recovery. During the five-days May Day holiday that ended on 5 May, online sales of home appliances and cooking appliances increased by 196% and 89% compared to the same period last year, according to Tmall, an online retailer operated by Alibaba.

Rising demands for comfort in household chores is accelerating household products replacement rate. Technology development is also one of the key drivers of change in consumption habits. Amid going intensive competitions from players in and outside of the sector, players in the smart home spaces are pushed to increase their knowhows in such fields as biometric identification, 5G, IoT, AI, and bigdata management. They would expect doing so to upgrade intelligent manufacturing capability, transform from traditional manufacturers into providers of integrated smart home services.

Smart diversification through M&A

Chinese buyers are reviewing M&A opportunities to diversify into the smart home space amid post-COVID-19 acceleration in digitalization and the increasing emphasis from manufacturers and retailers on security, health, as well as well-being issues.

According to China Outbound Smart Home Sector Preview One, where Mergermarket selected ten companies within the sector, the median return on equity (ROE) of players in the smart home space was 18% in FY19. In terms of growth, the global smart home market is anticipated to register a CAGR of 25% from USD 64.6bn in 2020 and reach USD 246.4bn by 2025, according to Mordor Intelligence.

Different sector players, different M&A strategies

Companies within the smart home space would review targets with well-known brands to help their operations in local markets. In the recent five years, they have increased their presences through M&A primarily in such countries/regions as the US, Europe, Japan, Australia, New Zealand and Southeast Asia, according to their disclosures and Mergermarket intelligences.

Consumer players that are looking for diversification into smart home expect to use M&A to help expand client bases and sales networks. While according to 12 selected companies, players from electronics, automation, and semiconductors would focus more on technology acquisitions. Integrated AI/IoT solutions, sensing, chips, modules, energy management, and interactive platform-related targets are on their radar. Such acquisitions aim to help them upgrade their manufacturing capabilities and products and push innovation.

Bargain hunting in Europe; US leads in the sector

The selected Chinese companies in this report expect to set up overseas subsidiaries, joint ventures or to make acquisitions in the local markets to better understand client needs and cut costs. Europe and the US are the top destinations.

Cheap valuations contributed to increased M&A activities in Europe. In 2020, the COVID-19 pandemic has made it an opportunity for China’s corporates, especially State-owned Enterprises (SOEs), to hunt for bargains in Europe, according to Bloomberg. Moreover, Chinese buyers find less competition from foreign counterparts who are busy handling the outbreak.The US has been the largest smart home market and will keep leading the sector. Push from technology giants like Google, Intel, Cisco, IBM and Microsoft, as well as well developed social systems and peoples’ awareness of security and eldercare are among key drivers for the sector’s continuous development in the US. The country took up a 40% of the smart home market share in 2019 globally.

Post pandemic hot target: kitchen appliances

With DIY and home-made projects, especially baking, gained ground during the lockdown, “kitchen appliances”turned to be among the post-pandemic hot targets in the smart home space. In 2020 YTD, Mergermarket recorded USD 2.3bn worth of M&A activity across 28 kitchen appliances-related deals, accounting for one fourth of deals announced in the area of smart home this year in both deal value and count. According to Mergermarket, 117 deals with combined deal value of USD 9.6bn were announced in the smart home space 2020 YTD. With an average EV/EBITDA multiple of 16.4x in 2020 YTD, valuation of assets in the sector, although dropped from last year (EV/EBITDA multiple of 18.4x in 2019), remained historical high. In the same space, M&A activities surged amid SARS outbreak at the end of 2002. One year after, Mergermarket recorded deal value in the sector of USD 38.5bn in 2003, up 312%. from the previous year (USD 9.3bn).

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