CMS: The probability of interest rate cuts in the United States has increased, and tool products are expected to usher in a new round of prosperity cycle

According to the Zhitong Finance APP, CMS released a research report stating that the tool industry exhibits characteristics of "many SKUs, large market space, high correlation with the real estate industry, and a relatively dispersed pattern." Europe and the United States are the main consumer markets. Currently, the U.S. real estate cycle is at the bottom, and the implementation of interest rate cuts is expected to initiate a new upward cycle, bringing elasticity to tool demand. On the individual stock level, reviewing Techtronic Industries (00669), it is found that its main success is attributed to capturing two rounds of prosperity cycles in the U.S. real estate industry, achieving resonance of β and α. CHERVON (02285) and Giant Star Technology (002444.SZ) are expected to seize the opportunity of the new upward cycle to increase market share, and are highly recommended.

The main points of CMS are as follows:

The tool industry has a wide variety of categories, with downstream applications primarily in real estate construction

Tools are divided into three main categories: hand tools, power tools, and outdoor power equipment. According to Stanley Black & Decker's annual report, the downstream application areas for tools include existing residential/repair/DIY, new residential, commercial construction, industrial & automotive repair, etc. Among them, existing residential/repair/DIY demand accounts for about 20%, mainly using consumer-grade products; new residential, commercial construction, and industrial & automotive repair account for 24%, 14%, and 14%, respectively, mainly using professional-grade and industrial-grade products.

The global market space is approximately $100-110 billion, with the industrial chain characterized by "China manufacturing, Europe and America consumption"

According to data from Fortune Business Insights, GuanYan Report Network, and Global Market Insights, the global hand tools market space is about $25 billion, power tools about $45-50 billion (of which electric tools are about $30 billion), and OPE about $30-35 billion, totaling approximately $100-110 billion. Due to the prevalence of DIY culture, European and American countries are the main consumer markets, while China, relying on its strong manufacturing industry, is the main production country. The two core roles in the industrial chain are manufacturers (OEM, ODM, OBM) and distributors. Due to the consumer goods attributes of tools, OBM brand owners and distributors enjoy higher premiums, while OEM and ODM profit margins are lower.

Demand side: The U.S. real estate cycle is at the bottom, and interest rate cuts are expected to initiate a new upward cycle

The U.S. real estate industry is highly sensitive to interest rates, which have been at a high level for three years, and real estate transaction volumes are at historical lows, suppressing demand in the tool industry. After the release of the U.S. July CPI, the probability of the Federal Reserve cutting interest rates by 25 basis points in September rose to 90.1%, and the probability of a cumulative cut of 50 basis points in October is 63.5%. The implementation of interest rate cuts is expected to promote an upward real estate cycle, bringing elasticity to tool demand. In terms of inventory, in 2021, the inventory of tool industry distributors reached a peak, and thereafter demand declined, leading the industry into a destocking phase, which is expected to end by mid-2024, after which distributors will enter a weak replenishment cycle, with current inventory levels being relatively low.

Reviewing the global leader Techtronic Industries

Since 2001, Techtronic Industries has achieved a 50-fold increase in performance and a 250-fold increase in market value, mainly due to the company's capture of two rounds of prosperity cycles in the U.S. real estate industry. During the first upward cycle, it successfully transformed into an OBM, and during the second upward cycle, it seized opportunities for technological upgrades and product iterations, becoming a global leader while continuously improving profit margins and ROE, reflecting the company's forward-looking strategic decisions Leading product strength and strong channel expansion capabilities.

Key recommendations: CHERVON, JUXING Technology

CHERVON has basically completed its OBM transformation, and JUXING's OBM revenue accounts for nearly 50%. Both companies have strong product capabilities, a relatively complete product matrix, and certain brand premium capabilities. Additionally, both companies have transferred some production capacity overseas to reduce tariff risks, significantly widening the gap with domestic ODM/OEM companies, reflecting α. CMS believes that a U.S. interest rate cut is a matter of time, and the real estate industry is at the starting point of a new prosperity cycle. CHERVON and JUXING are expected to seize this cycle and continue to increase market share, hence the key recommendation.

Risk Warning

Economic recession in Europe and the U.S., significant increase in raw material prices, tariff risks