J.PMorganNorth America Equity Research17May20HVAC Industry.203060双碳文库Residential Market Model Refresh:Perfect Storm3060双碳文库Brewing at the PeakResidential HVAC monthly trends have slowed,and look set for a volatileElectrical Equipment Multi-next few years from what looks like the peak in 2022 with the potential forIndustrya perfect storm of lower demand on destruction from higher cost to aC.Stephen Tusa,Jr CFA Acconsumer facing an increasingly challenging macro,a normalization in(1-212)622-6623replacement rate off of a peak level amidst elevated channel inventories.stephen.tusa@jpmorgan.comwhile raw materials begin to roll over,good news at first,but which addsBloomberg JPMA TUSAJ.P.Morgan Securities LLCto the above as a potential-combination of factors that could lead pricelower in a more Bearish scenario.In this note,we provide our updatedPatrick M.Baumann,CFA(1-212)622-0160residential HVAC model in advance of our annual report due out at a laterpatrick.m.baumann@jpmchase.comdate.There is no change to our stock views,which favor commercialJ.P.Morgan Securities LLCexposure versus residential exposure.Samantha A Yellen(1-212)622-5537Updating Resi model forecast:multi-year decline from 2022 peak,samantha.yellen@jpmchase.comwith volatility in between.With a strong 2021 in the books,and mostJ.P.Morgan Securities LLCOEMs calling for ~LSD volume growth in 2022,we refresh ourParth Patel,CPAresidential HVAC model.2021 ended up slightly lower than we(1212)6229327estimated at 9%growth (vs 13%expected)likely driven by supply chainparth.x2.patel@jpmchase.comconstraints,and we now assume a slightly higher 2022 growth rate as anJ.P.Morgan Securities LLCoffset (+3%vs-2%prior).This makes 2022 the peak,in our view,andPalash Dhakar(91-22)61575137we continue to see a volatile pattern over the next several years,with apalash.dhakar@jpmchase.combase case for unit declines at a 3%CAGR from 2022-2027,with 2025J.P.Morgan India Private Limited-the bottom at an 8mm unit market,>20%below our new '22 unitforecast of 10-10.5mm units.The key driver remains the expectednormalization in replacement rates,with volatility in the downtrendowing to regulatory deadlines that will drive some degree of pre-buyingin 2022 and 2024.Simply put,useful life has plummeted over the pasttwo years,driven by WFH dynamics and a flush consumer,which drovea dramatic shift in the replace versus repair equation.With currentshipment levels implying 11-12 years,we see this replacement bubbleultimately normalizing at 15-16 years that we believe remains the usefullife of systems as the drivers of recent years fade,while a morechallenging consumer macro,which includes higher prices as potentiallydestroying demand,is an unhelpful headwind203060双碳文库Equity Ratings and Price TargetsMkt CapRatingPrice TargetCompanyTicker($mn)Price($)CurPrevCurEndPrevEndDateDateWatscoWSO US9,179.30258.54Nn/c315.00De0-22n/cTrane Technologies33.866.04135.41UW160.00De0-22n/c7,855.53215.22UWn/c250.00De022Johnson ControlsJCIUS36,229.1251.81OWEmerson日ectric CoEMR US51223.1584.45NRCARRUS34518.763986N48.000e22See page 105 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware thatthe firm may have a confict of interest that could affect the objectivity of this report.Investors should consider this report as only a singlefactor in making their investment decision.www.jpmorganmarkets.comNorth America Equity Research17May2022203060双C.Stephen Tusa,Jr CFA(1-212)622-6623stephen.tusa@jpmorgan.com203060双203060双碳Inventories up when the risk on demand is to the downside.HARDIheadline distributor sales data has consistently outperformed AHRI,though adjusting for price suggests that HARDI unit "movement"hasactually underperformed AHRI.We believe that versus 2019 levels,assuming things were in balance,that the channel has about 5-10%more203060双inventory than it should,a number that goes to 15-20%if we use our2023 estimate.We do not expect a de-stock near term given channel filland pre-buy around the coming efficiency regulations so by year-end thiscould be even higher.Recent channel checks support this view,Pricing and mix dynamics positive for now,watching for demanddestruction...HVAC pricing is strong,up 12%in the unitary PPI and+20%for the distributor PPI.Since 2019,the compounded Unitary PPI is203060双碳文库23%while the distributor PPI is up 32%,prices we are seeing readthrough in OEM revenues to a typically lesser degree.Adding another 7-10%for the new,higher priced units that meet minimum efficiencyregulations,the cost of the baseline unit will have been up 30%over203060双three years.This is the type of inflation that sets the stage for anormalization in the heavy replace>repair dynamic that played out insuch a positive way for growth over the past few years-in other words,we see risk of demand destruction,similar to what we saw in 05/06 and08/09...and with commodities already rolling over,price will emerge as adebate:lower demand and deflation would be a negative203060双碳文库combination.There has been firm evidence of positive price disciplineas a hallmark of this industry for the past 15 years since the downturn,even when we had been in a generally deflationary environment,something we will not argue with.The magnitude of the pricing powerstands out in a material way from anything we have seen in recent years,203060双and looking back further,there have been periods over the past fewdecades in which industry pricing as measured by the HVAC unitary PPIhas been negative.We are not explicitly modeling in price cuts,but ifthere was ever a situation in which it were to happen,it will be the nextfew years if we are right on volumes.Weak demand,partly due to saidhigher prices,amongst the highest inventory levels on record,stoked byfears of supply,the all-time toughest comps on inflation/cost push in the203060双碳文库history of the data we track,with leading indicator commodities alreadynegative y/y,and the largest player having lost share with 2x currentcapacity are all negative factors.Price pressure would representdownside to our forecast and a change in the structural narrative.203060Margins are also a debate,and there could be some tailwind,butthere is risk price could follow raw materials this time.The point ofthis report is to re-establish a long term baseline model for residentialmarket demand (sales and volume),not to fully model companyearnings.This said,related to the above,with commodities rolling overalready,inflation should begin to subside but timing of the impact herelags by almost 12 months due to hedges and component pricing lag.203060双碳文库When and if it comes,we do see potential for at least a temporary