1、Equity Research 11 April 2019 FOCUS Barclays Capital Inc.and/or one of its affiliates does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Inve
2、stors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST CERTIFICATION(S)AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 63.Restricted-Internal U.S.Building Products The Darker Side of a U.S.-China Trade Resolution;Downgrading FBHS to UW U.S.-China
3、 Trade Resolution Complicated for Building Products:Ahead of a potential trade resolution between the U.S.and China,we examine the history of low-cost building product import disruption in the U.S.We conclude that most building products are vulnerable to disruption over time,although some categories
4、 are better insulated than others.Individual duties can be a temporary cure,but often lead to unintended consequences.Altogether,broader protectionism may have been the better outcome for building products.We think cabinets is the next likely category to fall victim.A History of Low-Cost Import Disr
5、uption:The characteristics of categories that have been disrupted are often similar.These include a fragmented market structure,less brand relevance,and reasonable shipping costs.Recent examples of disrupted industries with these characteristics include quartz countertops and luxury vinyl tile.Going
6、 back further,the U.S.furniture industry was among the first industries to face meaningful competition from Chinese imports,coinciding with the rise of China as a global player,and a category where imposed duties drove production to other low-cost countries.The appliance industry presents a differen
7、t but relevant study on how low-cost imports can disrupt even a mature industry with entrenched brands.Although not a Chinese story,the case shows how a strategy to penetrate a large U.S.market includes superseding tariff protection via shifting countries of production,while individual duties can dr
8、ive unintended demand consequences.Categories Vulnerable to Low-Cost Import Competition:The next category to be disrupted would accordingly exhibit a fragmented local manufacturing base with limited brand relevance and reasonable shipping economics.We believe wooden cabinets fits this bill.The 21%5-
9、yr CAGR in Chinese cabinet exports to the U.S.as of YE18 second only to quartz countertops and vinyl tile suggests the Chinese find the U.S.cabinet market attractive,and have likely expanded manufacturing capacity.Beyond cabinets,we believe most categories can ultimately become vulnerable particular
10、ly remembering the case of appliances,but dont see as much near-term risk with carpet,ceramic,paint,plumbing,doors,or windows.Notably,the Chinese housing market is flashing signs of cycling lower,which historically correlates with higher building products exports and potentially reduced export prici
11、ng.Downgrade FBHS to Underweight:Cabinets generates 30%of FBHS operating income,while“value”cabinetry is the highest margin business within the segment yet is likely the area to directly compete with the Chinese.While the recent history of Cabinets underperformance has been visible,we expect that th
12、e effects of Chinese import acceleration can still drive a more meaningful disruption to growth and profitability.Risks to our call include success with the AKCAs petition to impose duties without offsetting consequences,and strength in the Plumbing business this year noting improving price-cost tre
13、nds.We cut estimates and lower our target to$44(prior$45).INDUSTRY UPDATE U.S.Homebuilding&Building Products NEUTRAL Unchanged For a full list of our ratings,price target and earnings changes in this report,please see table on page 2.U.S.Homebuilding&Building Products Matthew Bouley+1 212 526 9029 B
14、CI,US Marshall Mentz,CPA+1 212 526 5941 BCI,US Christina Chiu+1 212 526 1341 BCI,US Barclays|U.S.Building Products 11 April 2019 2 Summary of our Ratings,Price Targets and Earnings Changes in this Report(all changes are shown in bold)Company Rating Price Price Target EPS FY1(E)EPS FY2(E)Old New 10-A
15、pr-19 Old New%Chg Old New%Chg Old New%Chg U.S.Homebuilding&Building Products Neu Neu Fortune Brands Home&Security,Inc.(FBHS)EW UW 49.67 45.00 44.00-2 3.68 3.60-2 4.06 3.91-4 Source:Barclays Research.Share prices and target prices are shown in the primary listing currency and EPS estimates are shown
16、in the reporting currency.FY1(E):Current fiscal year estimates by Barclays Research.FY2(E):Next fiscal year estimates by Barclays Research.Stock Rating:OW:Overweight;EW:Equal Weight;UW:Underweight;RS:Rating Suspended Industry View:Pos:Positive;Neu:Neutral;Neg:Negative Barclays|U.S.Building Products
17、11 April 2019 3 CONTENTS EXECUTIVE SUMMARY.4 CHINA TRADE RESOLUTION MORE COMPLICATED FOR BUILDING PRODUCTS.5 CHINESE DISRUPTION:WHATS HAPPENED.13 Case 1:Wooden Bedroom Furniture.13 Case 2:Quartz Countertops.15 Case 3:Washing Machines&Household Appliances.19 Case 4:The Flooring Industry.23 CHINESE DI
18、SRUPTION:WHATS HAPPENING.32 Cabinetry Vulnerable to Chinese Disruption.32 WHAT(PROBABLY)WONT HAPPEN.38 THE SAFER BETS IN BUILDING PRODUCTS.38 Case 1:Architectural Paint.38 Case 2:Residential Plumbing&Faucets.41 Case 3:Doors&Windows.43 WHERE CHINA WENT WRONG.45 WHAT IT MEANS FOR OUR COVERAGE.48 Downg
19、rading Fortune Brands to Underweight.48 U.S.-CHINA TRADE RELATIONS.57 Barclays|U.S.Building Products 11 April 2019 4 EXECUTIVE SUMMARY Recent tensions between the United States and China have put into focus longstanding trade dynamics between the two superpowers.In this report,we examine the history
20、 of low-cost Chinese import competition in building products,noting visibility to a full or partial trade resolution in the coming weeks.We conclude that most building products categories are vulnerable to low-cost import disruption over time,though certain industry characteristics make some categor
21、ies more defensible than others.We also find that individual duties that are meant to protect U.S.industry often lead to shifting production to other low-cost countries,with intensified low-cost competition only delayed rather than stopped.These duties can also lead to unintended near-term consequen
22、ces on demand following ensuing price increases.This means tariffs on the broad array of Chinese products may actually have been the better outcome for U.S.building products manufacturers.Broader tariffs may have reduced the likelihood of the Chinese investing heavily in any particular given categor
23、y,with demand consequences likely temporary.Past cases of Chinese disruption in Building Products include flooring(LVT),wooden furniture,and quartz countertops.Beyond China,we have seen the disruptive effect of low-cost imports in household appliances(washing machines).We take away patterns in these
24、 cases to determine which building product industries may be next to face heavy Chinese competition(cabinets)and which are relatively better positioned(architectural paint,plumbing,ceramic flooring,carpet,doors,and windows).We additionally highlight two examples(Chinese drywall and laminate flooring
25、)in which severe quality issues have left an ongoing stigma with Chinese building products.Implications for Our Coverage Downgrade FBHS to Underweight:Our analysis suggests future Chinese displacement risk in the cabinets industry,noting Cabinets generates 30%of FBHS operating income.Other Building
26、Products Names Less Vulnerable in the Near-Term:Categories with less near-term Chinese import risk include architectural paint and faucets(MAS),roofing(OC),carpet and ceramic tile(MHK),and doors and windows(JELD).MHK and luxury vinyl tile:We remain OW MHK despite ongoing competition from Chinese LVT
27、.We believe the most severe impact has already occurred over the past two years,while looking forward we expect MHK to improve domestic LVT manufacturing capability which will establish a more competitive foothold.FIGURE 1 Total U.S.Building Products Imports from China Becoming a Greater Share of To
28、tal Building Product Imports Source:U.S.Census Bureau,Barclays Research 27%29%31%33%36%38%40%42%42%41%41%42%41%42%41%42%43%02040608010012014016018020020022003200420052006200720082009201020112012201320142015201620172018$blnsROWChinaBarclays|U.S.Building Products 11 April 2019 5 CHINA TRADE RESOLUTION
29、 MORE COMPLICATED FOR BUILDING PRODUCTS Snapshot of Key Building Products and the Effect of Imports FIGURE 2 U.S.Building Product Markets By Manufacturing Source Source:Barclays Research,U.S.Census Bureau Disrupted by Low-Cost ImportsLess DisruptedDomesticChineseImportsROW ImportsBarclays|U.S.Buildi
30、ng Products 11 April 2019 6 Looking Beyond Recent Tariff-Related Volatility in Chinese Imports Import data for Chinese building products surrounding year-end 2018 point to a tariff-driven pull-forward of demand into December,with these imports increasing 39%y/y for the month before declining modestl
31、y in January(-3%y/y).Notably,this may lead to temporary distortions in channel inventory to begin 2019,which could be an issue for all of building products.Despite this near-term volatility,broader growth trends in the value of Chinese building product imports,as measured on a TTM basis,highlight a
32、trend of consistent increases(+12%y/y TTM in January).FIGURE 3 Y/Y Growth in Building Products Imports from China:Recent Volatility in Chinese Imports but Longer-Term Growth Trend has been Consistent Source:Barclays Research,U.S.Census Bureau Longer term growth trends,as measured by 10-and 3-year CA
33、GRs of import value,further highlight the momentum carried by Chinese building product imports.FIGURE 4 Multi-Year CAGRs for U.S.Imports of Key Chinese Building Products Source:Barclays Research,U.S.Census Bureau 12%39%(3%)(40%)(30%)(20%)(10%)0%10%20%30%40%50%60%70%Jan-14Apr-14Jul-14Oct-14Jan-15Apr-
34、15Jul-15Oct-15Jan-16Apr-16Jul-16Oct-16Jan-17Apr-17Jul-17Oct-17Jan-18Apr-18Jul-18Oct-18Jan-19Growth Y/Y-TTMMonthly Growth Y/YThough tariff-related pre-buy led to a 39%spike in Chinese building products imports in December and a(3%)decline in January,the smoothed trend indicates continuous growth in i
35、mported Chinese building products:-10%0%10%20%30%40%50%60%QuartzCountertopsVinyl TileWoodenKitchenCabinetsGlass FibersFaucets andRelatedDoors&WindowsCarpetsCeramicFlooringPaint10-Yr CAGR3-Yr CAGRBarclays|U.S.Building Products 11 April 2019 7 Shipping Costs for Chinese Building Products Have Declined
36、 Since the Mid-2000s Shipping costs for imported Chinese building products,measured as the cost of freight and insurance relative to the U.S.customs assessed product value,have declined from 16%in 2004 to 9%in 2018.During a similar time period,shipping costs for ROW imports of building products have
37、 declined from 10%(2005)to 5%(2018).End consumers of these products ultimately pay the shipping costs,indicating that the reduction in shipping costs has improved the competitive positioning of Chinese products,all else equal.FIGURE 5 Transportation Costs for Chinese Building Product Imports have De
38、clined Since the Mid-2000s While Narrowing the Gap with ROW Imports(%of Customs Value)The trend of declining shipping costs is not surprising to us in light of the overall growth of building products imports as well as increases in shipping container capacity.Source:U.S.Census Bureau,Barclays Resear
39、ch;Note costs displayed as a percent of Customs Value Among key building product import categories we analyzed,Chinese ceramic flooring has the highest relative transportation cost(18%of customs value)reflecting the categorys low relative value per unit of density(weight per unit of volume).FIGURE 6
40、 Current Transportation and Insurance Costs for Key Building Products Imports(%of Customs Value)Source:Barclays Research,U.S.Census Bureau;Note:Costs displayed as a percent of Customs Value 16%9%10%5%0%2%4%6%8%10%12%14%16%18%20022003200420052006200720082009201020112012201320142015201620172018ChinaRO
41、W18%11%9%8%7%6%3%3%14%5%5%2%7%3%3%2%0%2%4%6%8%10%12%14%16%18%20%CeramicFlooringGlass FibersQuartzCountertopsWindows&DoorsVinyl TileWooden KitchenCabinetsPaintFaucets andRelatedChinaROWBarclays|U.S.Building Products 11 April 2019 8 Softening Chinese Housing Cycle Could Foreshadow Greater Push to Expo
42、rt Building Products in China Broadly looking at the historical pattern of growth of the Chinese housing sales compared to the growth of Chinese building products exports to the U.S.,we see an inverse correlation.The Barclays House View still sees a housing downturn in China as a modest risk in 2019
43、,finding that most of the leading housing indicators including home sales,starts,and land purchases were decelerating in January-February.Furthermore,deceleration of land transaction value along with flattening new home price appreciation support a slowing housing environment.We believe this inverse
44、 relationship is unsurprising as excess Chinese building products capacity could result in a greater push to export additional product.Relaxed pricing on Chinese imports is another possibility in a true housing slowdown.FIGURE 7 Chinese Residential Buildings Sold vs.Chinese Building Products Exporte
45、d to the U.S.Building products exported from China to the U.S.tend to increase during periods of softening Chinese home sales.Source:China National Bureau of Statistics,US Census Bureau,Haver FIGURE 8 Chinese Value of Land Transactions Continues to Decelerate FIGURE 9 While Chinese New Home Price Ap
46、preciation is Flattening Source:China National Bureau of Statistics,Haver Source:China Index Academy/Soufun,Haver (25%)(13%)0%13%25%38%50%63%(40%)(20%)0%20%40%60%80%100%Dec-08Jun-09Dec-09Jun-10Dec-10Jun-11Dec-11Jun-12Dec-12Jun-13Dec-13Jun-14Dec-14Jun-15Dec-15Jun-16Dec-16Jun-17Dec-17Jun-18Dec-18T3M Y
47、/YChina Residential Buildings Sold(Floor Area)Chinese Building Products Exports to U.S.Recent softening in Chinese housing data could mean building products exports remain elevated,given a historical inverse correlation:(60%)(40%)(20%)0%20%40%60%80%100%120%140%160%Dec-08Aug-09Apr-10Dec-10Aug-11Apr-1
48、2Dec-12Aug-13Apr-14Dec-14Aug-15Apr-16Dec-16Aug-17Apr-18Dec-18T3M Y/YChina:Value of land transactions(10%)(5%)0%5%10%15%20%Apr-11Oct-11Apr-12Oct-12Apr-13Oct-13Apr-14Oct-14Apr-15Oct-15Apr-16Oct-16Apr-17Oct-17Apr-18Oct-18T3M Y/YChina:100-City Average House Price(New Houses)Barclays|U.S.Building Product
49、s 11 April 2019 9 Market Structure as Defense Against Low-Cost Imports In our view,industries that are more consolidated with fewer,larger players are better positioned against low-cost import competition relative to less consolidated,more fragmented industries.In the figure below,we show each build
50、ing product industry broken out by the market shares of the industry leader,#2 player,#3 player(if applicable),with the remaining share of the market comprised of imports,private label,and companies with less than 10%market share.FIGURE 10 Market Share of U.S.Building Products Categories(industries