Equity Research December 15, 2016

Haier Electronics Product competitiveness brought business improvement

Investment Focus Maintain BUY

Action Ticker 01169.HK Electronics is a global bellwether in home appliances and CICC investment rating BUY Last close HK$12.40 stands to benefit from product competitive improvement in 2017. Set TP at Rmb16.2 (13x 2017e P/E) and maintain BUY. CICC target HK$16.20

52wk price range HK$15.63~10.73 Reasoning Market cap (bn) HK$35 Daily value (mn) HK$34.99 Haier Electronics’ business is improving. Shares outstanding (mn) 2,792 1) Product competitiveness enhanced. 2) The original sales Free float (%) 100 system managed by both Haier and Haier Electronics is Daily volume (mn sh) 2.72 Business sector Home Appliances & Electronics integrated in 2016. Channel efficiency improved. 3) Air conditioner turnaround boosts RRS channel business. 01169.HK HSCEI 118

Washing machine business turning around in 4Q16. 1) 109 The company has been promoting laser welding cylinder, FPA variable frequency motors. Product competitiveness improved 100 significantly. 2) Washing machines and are 91 gradually targeting the high-end and customization market. (%) Value Relative 82

Casarte has become the leading among Rmb10k products. 73 In 2H16, ASP gradually moves down to match that of Siemen‟s; Dec-2015 Mar-2016 Jun-2016 Sep-2016 Dec-2016 trying to take market share from foreign . High-margin Casarte and customized products contribute 10% of total (Rmb mn) 2014A 2015A 2016E 2017E sales. 3) In 4Q16, we observed that Haier‟s Revenue 67,134 62,826 62,131 66,298 share in the washing machine market began to increase. (+/-) 7.8% -6.4% -1.1% 6.7% Net profit 2,447 2,703 2,817 3,143 See page 3 for water heater and logistics businesses (+/-) 20.1% 10.5% 4.2% 11.6%

EPS 0.88 0.97 1.01 1.13 Earnings forecast and valuation BPS 4.33 5.63 6.55 7.59 DPS 0.08 0.10 0.10 0.11 We expect 2016/17/18 EPS to be Rmb1.01/1.13/1.26, CPS 1.04 1.07 0.44 1.69 +4%, +12%, +12%, respectively. Maintain BUY and TP P/E 11.3 10.7 10.7 9.9 at HK$16.2, implying 13x 2017e P/E. P/B 2.3 1.8 1.6 1.5 EV/EBITDA 5.8 5.9 5.7 4.5

Risks Dividend yield 0.9% 1.0% 0.9% 1.0% Market demand fluctuates. ROAA 9.9% 9.4% 9.1% 9.3% ROAE 24.3% 19.4% 16.6% 15.9%

Source: Wind, Bloomberg, company data, CICC Research

Wei HE Haiyan GUO

Analyst Analyst [email protected] [email protected] SAC Reg. No.: S0080512010001 SAC Reg. No.: S0080511080006 SFC CE Ref: BBH812 SFC CE Ref: AIQ935

Please read carefully the important disclosures at the end of this report CICC Research: December 15, 2016

Financial summary

Financial statement (Rmb mn) 2014A 2015A 2016E 2017E Financial ratios 2014A 2015A 2016E 2017E Income statement Growth ability Revenue 67,134 62,826 62,131 66,298 Revenue 7.8% -6.4% -1.1% 6.7% Operating costs 57,292 52,833 52,082 55,366 Operating profit 20.5% 4.3% 6.2% 12.2% Business tax and surcharges 0 0 0 0 EBITDA 20.8% 4.1% 11.5% 14.1% Selling expenses -4,705 -5,348 -5,281 -5,635 Net profit 20.1% 10.5% 4.2% 11.6% Administrative expenses -2,245 -1,973 -1,926 -2,055 Profitability Finance costs -96 -71 -60 -66 Gross margin 14.7% 15.9% 16.2% 16.5% Others -21 -72 -72 -72 Operating margin 4.9% 5.4% 5.8% 6.1% Operating profit 3,262 3,403 3,613 4,055 EBITDA margin 5.1% 5.7% 6.4% 6.8% Non-operating income and expense 0 12 0 0 Net margin 3.6% 4.3% 4.5% 4.7% Profit before income tax 3,166 3,344 3,553 3,988 Liquidity Income tax -651 -609 -693 -798 Current ratio 1.81 1.79 2.01 2.04 Minority interest 68 32 43 48 Quick ratio 1.53 1.45 1.71 1.68 Net profit 2,447 2,703 2,817 3,143 Cash ratio 0.80 0.79 0.82 0.96 EBITDA 3,417 3,558 3,967 4,526 Liability / asset 56.0% 48.1% 42.4% 41.3% Balance sheet Net debt / equity net cash net cash net cash net cash Cash and bank balances 10,464 10,244 9,770 12,820 Return Trade and bill receivables 8,859 8,362 10,108 9,145 RoA 9.9% 9.4% 9.1% 9.3% Prepayments 0 0 0 0 RoE 24.3% 19.4% 16.6% 15.9% Inventories 3,668 4,399 3,553 4,901 Per-share data Other current assets 814 282 510 399 EPS (Rmb) 0.88 0.97 1.01 1.13 Total current assets 23,805 23,288 23,941 27,265 BPS (Rmb) 4.33 5.63 6.55 7.59 Fixed assets and CIP 2,655 3,943 5,115 6,169 DPS (Rmb) 0.08 0.10 0.10 0.11 Intangible assets 3,710 7,010 7,836 8,864 Cash flow per share (Rmb) 1.04 1.07 0.44 1.69 Total non-current assets 0 0 0 0 Valuation Total assets 27,515 30,297 31,777 36,130 P/E 11.3 10.7 10.7 9.9 ST borrowings 0 86 86 86 P/B 2.3 1.8 1.6 1.5 Trade and bill payables 3,109 4,090 3,007 4,537 EV/EBITDA 5.8 5.9 5.7 4.5 Other current liabilities 10,011 8,826 8,808 8,722 Dividend yield 0.9% 1.0% 0.9% 1.0% Total current liabilities 13,121 13,002 11,902 13,345 LT borrowings and bonds payable 1,801 1,125 1,125 1,125 Total non-current liabilities 2,293 1,573 1,573 1,573 Total liabilities 15,413 14,575 13,475 14,919 Shareholders' equity 12,102 15,722 18,302 21,211 Minority interest 612 879 922 970 Total liabilities & equity 27,515 30,297 31,777 36,129 Cash flow statement Net income 2,447 2,703 2,817 3,143 Depreciation & amortization 0 0 0 0 Change in working capital 0 0 0 0 Others 62 32 43 48 Cash flow from operations 2,903 2,990 1,215 4,717 Cash inflows from investing activities 624 0 0 0 Cash outflows from investing activities 964 2,544 1,409 1,385 Cash flow from investing -340 -2,544 -1,409 -1,385 Equity financing 0 0 0 0 Bank borrowings 97 876 -590 0 Others -196 63 -1,188 -281 Cash flow from financing 2,149 -750 -281 -282 Foreign exchange gain (loss) 8 85 0 0 Net changes in cash 4,720 -219 -475 3,050 Source: Company data, CICC Research

Company description

Haier Electronics is a subsidiary of Qingdao Haier. The company manufactures and sells washing machines and water heaters and uses Goodaymart to expand its integrated channel services to sell Haier-brand home appliances. Haier Electronics is orienting towards becoming a leading sales platform. The company will use Goodaymart‟s franchise store layout, large service system, and its large-format goods logistics capability to create a O2O model for home furnishings.

Please read carefully the important disclosures at the end of this report 2 CICC Research: December 15, 2016

Reasoning in full

Haier Electronics’ home appliance business is improving. 1) Product competitiveness enhanced. 2) The original sales system managed by both Qingdao Haier and Haier Electronics is integrated in 2016. Channel efficiency improved. 3) Air conditioner turnaround boosts RRS channel business.

Washing machine business turning around in 4Q16. 1) The company has been promoting laser welding cylinder, FPA variable frequency motors. Product competitiveness improved significantly. 2) Washing machines and refrigerators are gradually targeting the high-end and customization market. Casarte has become the leading brand among Rmb10k products. In 2H16, ASP gradually moves down to match that of Siemen‟s; trying to take market share from foreign brands. High-margin Casarte and customized products contribute 10% of total washing machine sales. 3) In 4Q16, we observed that Haier‟s share in the washing machine market began to increase.

Water heater market verifies improved channel ability. 1) Haier‟s share in the water heater market started to improve in 2016, ending the decline since 2013. 2) The main reason is Haier‟s channel efficiency improved and introduced competitive professional managers.

RRS leads large-format logistics. 1) RRS is the major logistic provider of home appliances in online shopping. It is the major appliance logistic provider of Tmall. The proportion of online large home appliance sales is relatively low, and there is still much room to improve in the future; 2) RRS furniture logistics is the major supplier of IKEA and will expand its furniture logistics capabilities. It has strategic value.

Please read carefully the important disclosures at the end of this report 3 CICC Research: December 15, 2016

Contents Reasoning in full...... 3 Brief introduction to Haier Electronics ...... 5 Haier Group’s deployment in home appliance ...... 5 Business introduction ...... 6 Haier’s business in ...... 6 Forward-looking deployment led by ZHANG Ruimin ...... 7 Haier’s ownership structure ...... 8 High-end and customized home appliances ...... 9 Casarte has become an influential high-end brand ...... 9 Fashion design and leading technology to win consumers ...... 10 Leading business model of home appliance customization ...... 11 Shares in washing machine and water heater markets began to rise ...... 13 The share in washing machine market began to rise since 4Q16 ...... 13 Haier’s washing machines are strongly competitive ...... 14 Water heaters benefit from channel efficiency boost...... 15 RRS—Logistics is the future ...... 18 Leading strength in large-format logistics for e-commerce ...... 18 Air conditioning turnaround is favorable to RRS’ distribution ...... 20

Figures Figure 1: Haier Group’s revenue and net profit in 2014 ...... 6 Figure 2: Mr. ZHANG Ruimin ...... 6 Figure 3: Haier Electronics’ revenue structure in 2015 ...... 7 Figure 4: Haier’s home appliance business in 2015 (excl. GE) ...... 7 Figure 5: Comparison of home appliance bellwethers’ revenue and gross margin...... 8 Figure 6: Haier’s ownership structure ...... 9 Figure 7: ASP of major fridge and washing machine brands in China in 2015 ...... 10 Figure 8: Retail prices of Casarte’s products (November 2016) ...... 10 Figure 9: Retail price of fridges and washing machines in domestic tier-1/2 markets ...... 11 Figure 10: Casarte’s fridges with leading designs and technologies ...... 11 Figure 11: Casarte’s washing machines have leading technologies and designs ...... 12 Figure 12: Sales volume of Haier’s customized products ...... 12 Figure 13: Haier’s fully automated fridge factories in Shenyang ...... 13 Figure 14: Fridge customization ...... 13 Figure 15: Breakdown of offline retail sales for washing machines ...... 14 Figure 16: Breakdown of domestic shipment for washing machines ...... 14 Figure 17: China’s washing machine retail market analysis (January~October 2016) ...... 15 Figure 18: “Wisdom balls” ...... 15 Figure 19: Accumulated dirt between cylinders...... 15 Figure 20: Laser welding cylinder ...... 16 Figure 21: Riveted cylinder ...... 16 Figure 22: Fisher & Paykel FPA variable frequency motors ...... 16 Figure 23: Traditional belt drive motors ...... 16

Please read carefully the important disclosures at the end of this report 4 CICC Research: December 15, 2016

Figure 24: Breakdown of offline retail sales of electric water heaters ...... 17 Figure 25: Breakdown of offline retail sales of gas-fired water heaters ...... 17 Figure 26: Electric water heater market share trend ...... 17 Figure 27: Gas water heater market share trend ...... 17 Figure 28: Haier water heater revenue YoY trend ...... 17 Figure 29: Share of washing machines sold through RRS in 2015 ...... 19 Figure 30: Share of water heaters sold through RRS in 2015 ...... 19 Figure 31: RRS ...... 20 Figure 32: RRS’ logistics revenue ...... 20 Figure 33: Share of online sales for different home appliances ...... 20 Figure 34: Domestic retail sales of air-conditioners among different brands ...... 21 Figure 35: Domestic shipment volume of air-conditioners among different brands ...... 21 Figure 36: Growth of shipment and retail volume in China’s AC market ...... 21 Figure 37: Domestic retailing volume of ACs (10,000 units) ...... 22 Figure 38: China Market Monitor’s data on retailing sales growth of ACs ...... 22 Figure 39: Historical P/E and P/B bands ...... 22 Figure 40: Comparable valuations ...... 23

Please read carefully the important disclosures at the end of this report 5 CICC Research: December 15, 2016

Brief introduction to Haier Electronics

Haier Group’s deployment in home appliance

Haier Group is the controlling shareholder of Qingdao Haier (600690.SH) and Haier Electronics (1169.HK). Qingdao Haier‟s development is heavily influenced by Mr. ZHANG Ruimin (CEO of Haier Group).

Figure 1: Haier Group’s revenue and net profit in Figure 2: Mr. ZHANG Ruimin 2014

Rmb bn 140 123 120 97 100 80 67 60 40 9 20 7 2 - Haier Group Qingdao Haier Haier Electronics

Revenue Net profit

Note: Qingdao Haier’s data is calculated by consolidating its Source: Company data, CICC Research overseas business Source: Company data, CICC Research

Recent major asset acquisitions (Haier Group): 1) Qingdao Haier spent Rmb4.87bn acquiring Haier Group‟s overseas home appliance business in 2015. 2) It spent US$5.4bn acquiring GE‟s home appliance business in 2016.

Issues pending resolution (Haier Group): 1) Haier Group‟s stake in Fisher & Paykel will be injected into Qingdao Haier before 2020 – it has not been injected yet due to high acquisition costs and poor profitability. 2) Qingdao Haier is positioned as a leading global home appliance manufacturer, while Haier Electronics as a leading sales and creative business development platform in China. At present, Qingdao Haier owns businesses for for fridges, air-conditioners and small appliances while Haier Electronics owns manufacturing businesses for washing machines and water heaters, as well as a distribution business (RRS). It remains to be seen how Haier Electronics‟ manufacturing businesses will be consolidated with Qingdao Haier.

Please read carefully the important disclosures at the end of this report 6 CICC Research: December 15, 2016

Business introduction

Haier enjoys No.1 market share for fridges, freezers and washing machines in China, No.2 for water heaters and No.3 for air-conditioners behind Gree and Midea. Its performance in the kitchen appliance and small appliance sectors is lukewarm.

Washing machine and water heater businesses are directly operated by Haier Electronics. RRS mainly distributes home appliances manufactured by Haier Group, including refrigerators and small appliances from Qingdao Haier and TVs from Haier Group; more than 60% of the above business is sold through RRS. RRS also deals with some non-Haier brand products, but not its mainstream business.

RRS includes distribution, logistics and after-sale service.

Figure 3: Haier Electronics’ revenue structure in Figure 4: Haier’s home appliance business in 2015 2015 (excl. GE)

1% 10% Air conditioners 18% 22% 25% Refrigerators Washing machines Washing machines Kitchen appliances Water heaters 2% Parts RRS distribution 8% 7% RRS logistics ICS 31% Others

57% 19%

Source: Company data, CICC Research Source: Company data, CICC Research Note: RRS distribution does not include distribution income of washing machines and water heaters.

Haier’s business in China

Qingdao Haier enjoys economy of scale and brand advantages for fridges, refrigerators, washing machines and water heaters, thus having high gross margin and strong profitability.

Haier Electric majors in washing machine and water heater business. and air conditioner business is sold through RRS which will also affect the Haier Electronics‟ performance.

Please read carefully the important disclosures at the end of this report 7 CICC Research: December 15, 2016

Figure 5: Comparison of home appliance bellwethers’ revenue and gross margin

Refrigerators Washing machines Water heaters Air conditioners Others Revenue(Rmb mn) Haier 27,589 17,470 4,607 16,251 2,013 Midea 11,423 12,018 ～5000 64,492 ～30,000 Gree 83,718 Kelon 11,556 8,986 Macro 2,180 GPM Haier 32.5% 34.3% 36.6% 28.2% Midea 23.2% 28.1% NA 28.3% Gree 36.0% 23.3% 20.6% Macro 36.5% Ranking (retail market) Haier 1st 1st 2nd (Electric) 3rd Midea 3rd 2nd 3rd (Electric) 2nd 1st in multiple categories Gree 1st Hisense Kelon 2nd 4th Macro 1st (Gas)

Source: Company data, China Market Monitor, CICC Research

Forward-looking deployment led by ZHANG Ruimin

Under the leadership of ZHANG Ruimin, Qingdao Haier has focused on forward-looking deployment. Although this deployment has not clearly contributed to earnings, we believe it deserves valuation premium given its strategic significance.

ZHANG Ruimin has put a number of innovative management ideas into practice, such as: 1) business model transformation from a traditional one into one integrating employee value and consumer value; 2) corporate transformation from manufacturing to service; 3) realization of a just-in-time sales network; 4) development of innovation platforms for small/micro-enterprises; 5) smart homes; 6) home appliance customization; and 7) a leading strength in large-format logistics for e-commerce.

Haier Electronics' RRS has large-scale commodity logistic abilities. Washing machine business has customization capabilities.

Please read carefully the important disclosures at the end of this report 8 CICC Research: December 15, 2016

Haier’s ownership structure

Figure 6: Haier’s ownership structure

Qingdao Haier Collective Asset Management Association

Haier Group

100% 51.2% Qingdao Haier Qingdao Haier Haier Electric Venture Capital Kitchen HCH (HK) International Co., Consulting Co., Equipment Co., Investment Ltd Ltd Ltd 2.62% 0.19% 17.52% 20.56%

Qingdao Haier (600690.SH)

100%

Haier (HK) Limited

29.78% 14.06% 0.28% 12.05%

Haier Electronics (1169.HK)

Source: Company data, CICC Research. Note: as of December 31, 2015.

Please read carefully the important disclosures at the end of this report 9 CICC Research: December 15, 2016

High-end and customized home appliances

Haier enjoys much higher gross margin, thanks to its high-end (Casarte) and customized (internet factory) offerings. Haier is progressing smoothly in promoting high-end and customized products in its stronghold areas such as washing machines and fridges, which may contribute ~10% domestic sales in 2016 and >10% in 2017 with positive profit.

Haier Electronics will benefit from the high-end washing machine business and washing machine customization, as well as channel profits from refrigerator business.

Casarte has become an influential high-end brand

Casarte is a self-developed high-end brand of Haier and it is one of the limited successful high-end home brands promoted by Chinese players (the other examples include Fontile and Robam). Haier introduced the brand in 2007 in US and European market, and then promoted the brand in China. At present, Casarte accounts for ~50% market share for fridges and washing machines priced >Rmb10,000. In 1H16, China Market Monitor‟s data show that Casarte‟s market share in fridge rose to 5.43%, and its share in >Rmb10,000 top-load washing machine increased to 61.5%.

Although Meling, Midea, Little Swan, Frestec and Kelong have also rolled out their high-end brands, their influence is limited.

By leveraging Haier‟s global resources, Casarte has kept introducing leading products in the market such as six-door fridges, French style side-by-side fridges and Italian style three-door fridges. Besides, Haier has integrated the technologies of Fisher & Paykel and and introduced low-noise washing machine and V-series super-thin air-conditioners.

In China, Casarte‟s main rival is . Although Samsung and ‟s products are expensive, their market share is low. Siemens targets high-end market with a relatively wide price range. Bosch Siemens‟ sales reached EUR1.81bn in 2014 (Rmb13bn), and Casarte‟s sales may reach Rmb4bn in 2016.

Figure 7: ASP of major fridge and washing Figure 8: Retail prices of Casarte’s products machine brands in China in 2015 (November 2016)

Rmb/Set 9,000 7,855 8,000 6,808 7,000 5,939 6,000 4,601 4,324 5,000 3,734 Rmb/Set Lowest Highest 4,000 2,915 3,286 2,397 2,579 2,333 3,000 1,524 Refrigerators 4,199 32,999 2,000 1,000 Drum washing machines 5,999 19,999 0 Air conditoners 5,699 7,999

Refrigerators Washing machines

Source: China Market Monitor, CICC Research Source: Company data, CICC Research

Please read carefully the important disclosures at the end of this report 10 CICC Research: December 15, 2016

Casarte‟s figure is included in Haier. Based on the retail price of fridges and washing machines in domestic tier-1/2 markets, we can see that Casarte and Siemens are the dominant players in the high-end fridge and washing machine markets with similar market share. Casarte enjoys competitive edge in the >Rmb10,000 market, but the market size is limited. In 2016, Casarte has introduced a number of products with slightly lower prices to compete directly with Siemens‟ main market.

Figure 9: Retail price of fridges and washing machines in domestic tier-1/2 markets Price range Price range Refrigerators Haier Siemens Refrigerators Haier Siemens (Rmb) (Rmb) Overall 100.0% 27.4% 12.3% Overall 100.0% 26.5% 13.3% <4,000 47.3% 14.1% 1.8% <2,500 36.4% 25.8% 0.9% 4,000~9,000 37.5% 46.1% 21.4% 2,500~5,500 49.8% 27.0% 19.8% 9,000+ 15.3% 22.5% 22.6% 5,500+ 13.8% 26.7% 22.8%

Source: China Market Monitor, CICC Research

Fashion design and leading technology to win consumers

Take fridges for example, Haier has introduced six-door fridges, French style side-by-side fridges and Italian style three-door fridges, all with fashionable designs. In 2015, it unveiled its air-suspension compressor fridge, which has better energy-saving and temperature-control performances. In 2016, it launched a refrigerator without compressors.

Figure 10: Casarte’s fridges with leading designs and technologies

Source: Company data, CICC Research

For washing machines, Haier introduced a top-load washing machine with more stable operation and lower noise level in 2010. In 2015, it unveiled a washing machine that did not need regular cleaning. Such innovations are driven by leading technologies such as FPA direct drive motors.

Please read carefully the important disclosures at the end of this report 11 CICC Research: December 15, 2016

Figure 11: Casarte’s washing machines have leading technologies and designs

Source: Company data, CICC Research

Leading business model of home appliance customization

Haier is trying to transform from large-scale manufacturing into large-scale customization to meet client customization demands and realize industrial upgrading. In 2Q15, the firm launched customized home appliance and began allowing consumers to order customized products on platforms like diy.haier.com and www.ehaier.com. For example, consumers can choose the capacity, temperature control method, door materials and design for fridges, the capacity, color and window for washing machines and the power, appearance and additional functions for air-conditioners. Consumers can watch the customization process online.

This service has enjoyed rapid growth, and sales volume in 3Q16 reached 330,000 units. Customization‟s penetration is still low, but it should enjoy broad upside ahead. We expect the sales volume of customized products to exceed 1mn units in 2016, accounting for ~2% of Haier‟s total sales volume.

Figure 12: Sales volume of Haier’s customized products

350 1,000 units 330

300 269 250

200

150 133 99 100 43 50 9 0 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Source: Company data, CICC Research

The customization service was launched on the back of Haier‟s leading strength in smart manufacturing and logistics. In 2015, Haier established seven internet factories and realized seamless, visible and transparent manufacturing.

Please read carefully the important disclosures at the end of this report 12 CICC Research: December 15, 2016

Figure 13: Haier’s fully automated fridge factories Figure 14: Fridge customization in Shenyang

Source: Company data, CICC Research Source: article.pchome.net, CICC Research

Please read carefully the important disclosures at the end of this report 13 CICC Research: December 15, 2016

Shares in washing machine and water heater markets began to rise

Benefiting from long-term product competitiveness, dual-channel management (Qingdao Haier and Haier dual management), and structural adjusted to single-line management, efficiency is obviously improved. Water heater market share remarkably improved since 2016 while washing machine market share improved significantly since 4Q2016.

The share in washing machine market began to rise since 4Q16

The current washing machine market has formed a duopoly pattern. During the last two years, Haier focuses on product upgrades in washing machine market but ignored sales strategy. Little Swan thus seized the opportunity and integrated second and third tier brands, realized rapid growth; its current sales have come very close to Haier with basically the same market share. Washing machine thus evolved into a duopoly pattern.

Figure 15: Breakdown of offline retail sales for Figure 16: Breakdown of domestic shipment for washing machines washing machines

Haier 18% Haier Midea 27% 29% Midea+Little Swan 21% Siemens 33% 1% 26% 30% 33% 3% Sanyo Sanyo 1% 3% 8% Panasonic TCL 8% Bosch 1% Meiling 1% 4% 6% 7% 21% 4% Royalstar 7% Others 13% 6% 25% 23% Others 14% Inner circle: 2015 Inner circle: 2015 Outer circle: 16.1~10 27% Outer circle: 16.1~10

Source: China Market Monitor, CICC Research Source: chinaIOL.com, CICC Research

From January to October 2016, we can see Midea and Little Swan‟s retail volume of washing machines had little difference from Haier. The main difference is in the drum washing machine market. In drum washing machine market, foreign brands have great influence. Little Swan and Midea‟s drum washing machine still has low ASP. Haier's drum washing machine‟s ASP has exceeded the average level, but still cheaper than foreign brands. However, we believe Haier is on the rise in drum washing market due to its rising competitiveness.

Please read carefully the important disclosures at the end of this report 14 CICC Research: December 15, 2016

Figure 17: China’s washing machine retail market analysis (January~October 2016) Top-load Drum Market 1st Tier 2nd Tier 3rd Tier 4th Tier washing washing machines machines Retail volume Haier 26.9% 25.2% 28.2% 27.8% 26.4% 30.8% 23.6% Little Swan+Midea 26.9% 24.6% 27.2% 27.7% 33.8% 30.2% 24.5% Retail value Haier 27.6% 26.1% 28.9% 28.3% 27.3% 33.9% 24.7% Little Swan+Midea 22.8% 20.0% 23.1% 24.8% 30.9% 29.0% 19.8% ASP (Rmb/Set) Haier 2,445 1,730 3,798 Little Swan 2,216 1,672 3,136 Midea 1,586 1,177 2,441 Market average 2,384 1,572 3,634 Overseas brands 3,273 1,860 4,072 Domestic brands 1,985 1,494 3,247

Source: CMM, CICC Research

Haier’s washing machines are strongly competitive

In top-load washing machines, Haier‟s innovative cleaning-free solution addressed consumers‟ pain points: 1) after using washing machines for some time, there will be dirt accumulated inside and outside the cylinders. 2) Haier uses soft cleaning particles (hereinafter referred as “wisdom balls”), water flow will drive the wisdom ball in the barrel to move between the internal and external cylinders, therefore to form collision and friction, to achieve the effect of self-clean.

Figure 18: “Wisdom balls” Figure 19: Accumulated dirt between cylinders.

Source: washer.hea.cn, CICC Research Source: washer.hea.cn, CICC Research

In drum washing machines, Haier digested and absorbed the technology of Fisher & Paykel. 1) Haier introduced automatic production line from Fisher & Paykel, amethyst drum washing machine uses seamless laser welding within the cylinder. 2) In 2015, Fisher & Paykel built FPA variable frequency motor in Qingdao. Haier's new crystal series adopted the new motors.

Laser welding cylinder is better than the riveting cylinder: 1) laser welding cylinder is smoother, riveted cylinder on the other hand has gap at convergence, which makes it easier to wear and tear clothes. 2) Laser welding inner cylinder tensile strength is 3.5 times the riveting cylinder and spins faster.

Please read carefully the important disclosures at the end of this report 15 CICC Research: December 15, 2016

Figure 20: Laser welding cylinder Figure 21: Riveted cylinder

Source: www.jdbbs.com, CICC Research Source: www.jdbbs.com, CICC Research

FPA variable frequency motor is superior to the traditional belt drive motor: FPA variable frequency motor adopts gear transmission; the advantage lies in more precise control and little noise.

Figure 22: Fisher & Paykel FPA variable frequency Figure 23: Traditional belt drive motors motors

Source: mt.sohu.com, CICC Research Source: mt.sohu.com, CICC Research

Water heaters benefit from channel efficiency boost

Haier has remained competitive in electric water heaters, but it is lackluster in gas-fired water heaters.

Please read carefully the important disclosures at the end of this report 16 CICC Research: December 15, 2016

Figure 24: Breakdown of offline retail sales of Figure 25: Breakdown of offline retail sales of electric water heaters gas-fired water heaters

A.O.Smith A.O.Smith 12% 16% 20% Rinnai Haier 1% Vanward 3% 17% 13% Midea 18% 3% 1% 34% 4% Macro 3% 34% 3% 3% Vanward 4% Noritz 3% 7% Macro 6% 13% Midea 13% Whirlpool Haier 17% 8% 18% Vatti 8% Vatti 9% 12% 24% Others 12% Others 12% Inner circle: 2015 9% 26% Inner circle: 2015 Outer circle: 16.1~10 11% Outer circle: 16.1~10

Source: China Market Monitor, CICC Research Source: China Market Monitor, CICC Research

In the water heater market, Haier faces threats from high-end AO Smith and the low-end Midea and saw its market share gradually decline in the past.

Haier‟s water heaters started to reverse the trend in 2016: 1) from January to October 2016 a slight increase in market share. 2) January~October 2016 water heater market grew 8.2%, Haier increased 11.4%, slightly faster than the market. 3) In 1~3Q2016, Haier‟s income from water heaters +7.7% YoY.

Figure 26: Electric water heater market share trend Figure 27: Gas water heater market share trend

40% 25% 35% 20% 30% 25% 15% 20% 15% 10% 10% 5% 5%

0% 0%

2011 2012 2013 2014 2015

2014 2011 2012 2013 2015

16.1~10 16.1~10

Haier Midea A.O.Smith Haier Midea A.O.Smith

Source: CMM, CICC Research Source: CMM, CICC Research

Figure 28: Haier water heater revenue YoY trend

10%

8% 8% 6% 4% 4% 2% 1% 0% -2% -3% -4% 2013 2014 2015 1Q-3Q2016

YoY

Source: Company announcement, CICC Research

Please read carefully the important disclosures at the end of this report 17 CICC Research: December 15, 2016

Haier water heater‟s recovery is mainly due to improved channel efficiency. Water heater is the first part of business to improve is mainly due to the introduction of AO Smith water heater business director who has strong abilities.

Please read carefully the important disclosures at the end of this report 18 CICC Research: December 15, 2016

RRS—Logistics is the future

Brief introduction to RRS

RRS offers distribution, logistics and after-sales services.

RRS distribution: 1) its strength lies in tier-3/-4 markets. It mainly sells Haier Group's TVs and mobile phones, Qingdao Haier's refrigerators, air conditioners, and small appliances, and Haier Electronics‟ washing machines and water heaters. 2) RRS once tried to develop the distribution of third-party brands which have direct competition with Haier products; but this strategy started to shrink in 2015 and is no longer the focus of development as e-commerce also starts rising. 3) 60% of Haier‟s home appliance business is sold through RRS.

Figure 29: Share of washing machines sold Figure 30: Share of water heaters sold through through RRS in 2015 RRS in 2015

70% 66% 66% 66% 90% 79% 81% 80% 60% 80% 70% 50% 60% 40% 50% 30% 40% 30% 20% 20% 10% 10% 0% 0% 2013 2014 2015 2013 2014 2015

Source: Company data, CICC Research Source: Company data, CICC Research

Leading strength in large-format logistics for e-commerce

RRS boasts leading strength in large-format logistics for e-commerce. After gaining investment from Alibaba in December 2013, RRS has become the major supplier of large-format logistics service for Tmall, whose order for large-format home appliance increased by 104% YoY in 2015 and rose 78% in 1H16. 2) RRS boasts a peak capacity of 900,000 parcels per day, daily capacity of 500,000 parcels for seven consecutive days, and normal capacity of 250,000 parcels per day, leading the sector.

RRS‟s logistics capacity for large-format home appliance is based on resource consolidation of Haier‟s specialty stores. 1) RRS‟ revenue rose 34% YoY to Rmb6.58bn in 2015 with gross margin of 10.2% and ~40% revenue from delivering Haier‟s home appliances. 2) As of June 30, 2016, RRS has established 42 primary distribution centers in China and 100 regional logistics centers with 800,000sqm proprietary warehouses and 2.1mn sqm leased warehouses. Besides, it has set up distribution stations in >2,800 counties. Its fleet has adopted a light-asset model. Haier‟s dealers own most fleets.

Looking ahead, RRS may develop towards logistics for furnishing e-commerce and cold-chain e-commerce. Although these models are not mature, they are of strategic value.

Please read carefully the important disclosures at the end of this report 19 CICC Research: December 15, 2016

Figure 31: RRS Figure 32: RRS’ logistics revenue

7 Rmb bn 6.6 6 4.9 5

4 3.2 3.4 2.9 3 2.2 2

1

0 2010 2011 2012 2013 2014 2015

Source: ebrun.com, CICC Research Source: Company data, CICC Research

The share of online sales is not high and still has room to rise in the future. In 2015, the share of online sales is no more than 20% for air conditioners, refrigerators, kitchen appliances, washing machines.

In addition, the furniture electrical business logistics market is still in its infancy.

Figure 33: Share of online sales for different home appliances

30% 25% 25% 23% 19% 17% 20% 15% 15% 10% 11% 10% 5%

0%

TVs

Washing

machines

appliances

Refrigerators

Built-in kitchen Built-in

Air conditioners Air

Small appliancesSmall Home appliances Home

Source: Company data, CICC Research

Please read carefully the important disclosures at the end of this report 20 CICC Research: December 15, 2016

Air conditioning turnaround is favorable to RRS’ distribution

RRS‟ distribution business benefits from air conditioner turnaround. Qingdao Haier „s air conditioner revenue totaled Rmb16.2bn in 2015, we expect over Rmb10bn is sold through RRS, accounting for 1/3 of RRS‟ total revenue, a significant impact.

Haier remains 3rd in the air conditioner market. Benefiting from the turnaround, we expect revenue to increase more than 20% in 2017.

Figure 34: Domestic retail sales of air-conditioners Figure 35: Domestic shipment volume of among different brands air-conditioners among different brands

17% 18% Gree 24% 17% Midea 13% Midea 25% 3% Gree Haier 8% 5% 3% 40% Haier 8% 5% 43% Hisense Kelon Chigo 4% 4% 4% 9% 3% Aux 6% 3% Hisense Kelon TCL 12% 31% Others 24% Others 10% 10% 34% Inner circle: 2015 Inner circle: 2015 Outer circle: 2016.1~10 Outer circle: 16.1~10 17%

Source: CMM, CICC Research Source: ChinaIOL, CICC Research

The AC destocking cycle ended in 2H16. August 2015~ July 2016 represents the worst time for corporate shipments due to distribution channels‟ efforts to reduce inventory. However, restocking cycle started from 3Q16.

Figure 36: Growth of shipment and retail volume in China’s AC market

50.0%

40.0% Restocking Destocking 30.0%

20.0%

10.0%

0.0%

-10.0%

2005 2006 2007 2008 2009 2010 2011 2012 2014

2H15 1H13 2H13 1H15

-20.0% 2016.1~5

-30.0% Destocking -40.0%

-50.0% Shipment volume YoY Retail sales volume YoY

Source: chinaIOL.com, CICC Research

Please read carefully the important disclosures at the end of this report 21 CICC Research: December 15, 2016

Retailing sales of ACs started to rise from 2H16. 1) Retailing demand for ACs did not rise in 2014, 2015 or 1H16. According to China Market Monitor, retailing volume‟s decline accelerated slightly in 1H16, but rose 26% YoY in 3Q16, marking clear improvement. 2) The rise in retailing sales is driven by upside surprises in temperature in 2016‟s summer. 2014 and 2015 had cold summer, but 2016 had a hot summer. Besides, the rising housing sales from 2015 also boosted demand.

Figure 37: Domestic retailing volume of ACs Figure 38: China Market Monitor’s data on retailing (10,000 units) sales growth of ACs

5,000 4,746 30% 26% 4,359 4,390 4,379 23% 4,500 4,225 4,004 20% 15% 4,000 3,500 10% 3,000 0% 2,500 -1% 2,000 -4% -4% -10% -7% 1,500 -20% 1,000 -20% 500 -30%

-

2011 2010 2012 2013 2014 2015 1H16

2010 2011 2012 2013 2014 2015 3Q16

Note: Excl. engineering demand Note: China Market Monitor only calculate offline sales from Source: AVC, CICC Research home-appliance chain stores Source: China Market Monitor, CICC Research

Figure 39: Historical P/E and P/B bands

PE Band PB Band Haier Electronics 5x 10x 15x 20x Haier Electronics 2x 3x 4x 5x 30 Rmb 40 Rmb 35 25 30 20 25 15 20 15 10 10 5 5

0 0

10/12 13/06 09/12 10/06 11/06 11/12 12/06 12/12 13/12 14/06 14/12

09/12 10/06 10/12 11/06 11/12 12/06 12/12 13/06 13/12 14/06 14/12 15/06 15/12 16/06 16/12

Source: Wind Info, CICC Research

Please read carefully the important disclosures at the end of this report 22 CICC Research: December 15, 2016

Figure 40: Comparable valuations

Price Mkt cap Net profit (Local currency) EPS （ Local) P/E Ticker Company (Local) (USD mn) 2015A YoY 2016E YoY 2017E YoY 2015A 2016E 2017E 2015A 2016E 2017E FY15/16 FY/16/17 FY/17/18 FY15/16 FY/16/17 FY/17/18 FY15/16 FY/16/17 FY/17/18 A-Share 000651.SZ 25.30 22,048 12,532 -11% 14,437 15% 15,717 9% 2.08 2.40 2.61 12.1 10.5 9.7 000333.SZ 28.40 26,433 12,707 21% 14,875 17% 17,400 17% 1.98 2.32 2.71 14.4 12.3 10.5 600690.SH Qingdao Haier 9.98 8,815 4,301 -14% 4,891 14% 6,217 27% 0.71 0.80 1.02 14.1 12.4 9.8 600983.SH Whirlpool (China) 13.00 1,443 367 25% 453 24% 525 16% 0.48 0.59 0.69 27.2 22.0 19.0 600839.SH Changhong 4.17 2,789 -1,976 465 397 -15% -0.43 0.10 0.09 41.4 48.5 600060.SH Hisense 16.97 3,217 1,489 6% 1,749 17% 2,053 17% 1.14 1.34 1.57 14.9 12.7 10.8 002242.SZ Joy oung 18.30 2,035 620 17% 697 12% 801 15% 0.81 0.91 1.04 22.7 20.1 17.5 002032.SZ 32.73 2,995 889 29% 1,041 17% 1,214 17% 1.41 1.65 1.92 23.3 19.9 17.0 002035.SZ Vatti 26.72 1,406 208 -26% 316 52% 390 23% 0.57 0.87 1.07 46.7 30.7 24.9 002508.SZ Robam 37.09 3,923 830 45% 1,150 38% 1,498 30% 1.14 1.58 2.05 32.6 23.5 18.1 300403.SZ Idear Hany u 62.14 1,206 148 13% 205 39% 317 55% 1.10 1.53 2.37 56.3 40.6 26.2 002403.SZ Aishida 14.71 747 113 39% 149 31% 190 28% 0.32 0.42 0.54 45.4 34.7 27.1 002705.SZ Xinbao Electric 16.64 1,385 284 33% 420 48% 530 26% 0.49 0.73 0.92 33.7 22.8 18.0 603355.SH Lexy 47.13 2,738 364 6% 440 21% 507 15% 0.91 1.10 1.26 51.9 42.9 37.3 000921.SZ Hisense Kelon 9.97 1,968 1,489 6% 1,749 17% 2,053 17% 1.09 1.28 1.51 9.1 7.8 6.6 603868.SH Fly co 45.62 2,879 502 35% 639 27% 807 26% 1.15 1.47 1.85 39.6 31.1 24.6 000418.SZ Little Swan 3,137 919 32% 1,206 31% 1,485 23% 1.45 1.91 2.35 000016.SZ Konka 4.59 1,601 -1,257 -2488% -0.52 -8.8 A-share average H-Share 1169.HK Haier Electronics 12.40 4,464 2,703 10% 2,817 4% 3,143 12% 0.97 1.01 1.13 10.7 10.7 9.9 0751.HK Sky worth 4.35 1,679 2,170 73% 2,081 -4% 2,515 21% 0.72 0.69 0.84 6.0 6.3 5.2 1070.HK TCL Multimedia 3.77 844 26 -89% 285 994% 410 44% 0.01 0.16 0.24 251.8 23.0 16.0 0921.HK Hisense Kelon 6.33 1,112 1,489 6% 1,749 17% 2,053 17% 1.09 1.28 1.51 5.8 4.9 4.2 H-share average 9.9 8.9 7.8 US WHR US Whirlpool 178.14 13,380 783 20% 1,073 37% 1,197 12% 10.42 14.29 15.94 17.1 12.5 11.2 UTX US United Technology 110.31 90,830 7,608 22% 5,368 -29% 5,206 -3% 9.24 6.52 6.32 11.9 16.9 17.4 AOS US A.O.Smith 49.91 8,680 283 36% 324 15% 362 12% 1.63 1.86 2.08 30.7 26.8 24.0 IR US Ingersoll-Rand plc 77.84 20,108 665 -29% 1,120 69% 1,165 4% 2.57 4.34 4.51 30.3 17.9 17.3 HELE US Helen of Troy Ltd 84.25 2,348 101 17% 134 32% 172 28% 3.63 4.81 6.16 23.2 17.5 13.7 CREE US Cree, Inc 27.25 2,717 -22 -117% 89 -514% 54 -39% -0.22 0.89 0.54 -126.2 30.5 50.3 IRBT US IROBOT 60.17 1,633 44 17% 45 3% 52 15% 1.63 1.67 1.93 37.0 36.0 31.1 GPRO US GPRO 8.82 1,240 36 -72% -206 -670% -44 -78% 0.26 -1.47 -0.32 34.3 -6.0 -28.0 FIT US FIT 7.65 1,712 176 33% 142 -19% 168 18% 0.79 0.63 0.75 9.7 12.1 10.2 US Average 14.7 17.6 17.1 Europe ELUXB.SS 219.00 7,390 1,566 -30% 4,498 187% 4,860 8% 5.07 14.56 15.73 43.2 15.0 13.9 DLG.IM De'Longhi 21.65 3,444 150 18% 158 6% 178 12% 1.00 1.06 1.19 21.6 20.4 18.2 SK.FP SEB 127.75 6,820 206 21% 274 33% 380 39% 4.10 5.45 7.58 31.1 23.4 16.9 RAA GY Rational 412.00 4,985 122 11% 129 6% 145 12% 10.71 11.39 12.77 38.5 36.2 32.3 OSR GR OSRAM 47.41 5,281 397 111% 337 -15% 245 -27% 3.79 3.22 2.34 12.5 14.7 20.2 PHIA.NA 27.99 28,244 645 55% 1,394 116% 1,653 19% 0.68 1.47 1.74 41.2 19.0 16.1 AMC PW WRONKI SA 186.00 346 97 24% 120 23% 132 10% 12.50 15.41 16.98 14.9 12.1 11.0 DLC IM DeLclima -30 24 -180% 25 6% -0.20 0.16 0.17 METN SW Metall zug 3,220.00 7,035 57 -34% 74 30% 91 23% 25.80 33.61 41.23 124.8 95.8 78.1 Europe Average Japan 6502.JP Toshiba 468 17,244 -460,013 -864% 167,402 -136% 137,099 -18% -108.56 39.50 32.35 -4.3 11.8 14.5 6367.JP Daikin Industries 10,790 27,511 136,986 48% 148,209 8% 165,036 11% 467.35 505.64 563.04 23.1 21.3 19.2 6752.JP Panasonic 1,301 27,750 193,256 60% 152,129 -21% 189,525 25% 78.78 62.02 77.26 16.5 21.0 16.8 6758.JP Sony 3,372 37,052 147,791 -215% 92,167 -38% 243,996 165% 117.00 72.96 193.16 28.8 46.2 17.5 6501.JP Hitachi 636 26,728 172,155 -58% 231,705 35% 274,009 18% 35.62 47.94 56.69 17.8 13.3 11.2 6503.JP 1,660 30,996 228,494 49% 201,099 -12% 232,499 16% 106.41 93.66 108.28 15.6 17.7 15.3 5943.JP Noritz 2,051 906 -3,958 -214% 3,164 -180% 5,979 89% -77.92 62.28 117.70 -26.3 32.9 17.4 5947.JP Rinnai 9,460 4,297 22,710 -2% 23,463 3% 25,381 8% 434.92 449.35 486.07 21.8 21.1 19.5 7965 JP Corp 1,533 968 6,314 68% 8,644 37% 9,556 11% 86.97 119.06 131.62 17.6 12.9 11.6 6753.JP Sharp 245 10,620 -255,972 -2314% -50,245 -80% 6,368 -113% -51.37 -10.08 1.28 -4.8 -24.3 191.7 6755 JP FUJITSU GENERAL LTD 2,309 2,195 17,531 33% 15,766 -10% 18,811 19% 160.43 144.28 172.14 14.4 16.0 13.4 Japan average 104.3 21.6 16.4 Korea 066570.KS LG Electronics 48,300 6,774 124,394 -69% 474,579 282% 798,264 68% 760.13 2,900.00 4,877.94 63.5 16.7 9.9 005930.KS 1,777,000 214,250 18,694,628 -19% 21,404,403 14% 26,254,718 23% 132,888.26 152,150.34 186,628.16 13.4 11.7 9.5 021240.KS Coway 90,300 5,911 343,148 37% 261,723 -24% 379,017 45% 4,492.61 3,426.57 4,962.22 20.1 26.4 18.2 192400 KS CUCKOO 137,000 1,151 74,616 -18% 82,450 10% 96,030 16% 7,611.22 8,410.38 9,795.57 18.0 16.3 14.0 Korea average 13.8 12.0 9.7 Others FPH NZ Fisher & Pay kel 8.22 3,365 143 48% 168 17% 198 18% 0.25 0.30 0.35 32.5 27.7 23.5 CIC PM Conception Industrial 57 390 667 5% 920 38% 1,098 19% 1.97 2.72 3.25 29.0 21.1 17.6 ARCLK.TI Arcelik 21 4,050 891 44% 1,143 28% 1,048 -8% 1.32 1.69 1.55 15.8 12.3 13.4 VESBE TI VESTEL 11 623 164 25% 145 -12% 168 16% 0.86 0.76 0.88 13.2 15.0 12.9 9911 TT TAIWAN SAKURA 37 254 517 -4% 740 43% 882 19% 2.34 3.35 3.99 15.6 10.9 9.2 1614 TT TAIWAN SANYO 25 210 256 13% 0.95 26.1 PMM MK PANASONIC MANUFACTURING MALA 32 433 147 82% 153 4% 159 4% 2.42 2.52 2.62 13.1 12.6 12.1 SYML IN SYMPHONY LTD 1,226 1,272 1,799 2,317 29% 25.72 33.12 47.7 37.0 WHIRL IN WHIRLPOOL OF INDIA LTD 871 1,639 2,474 101% 19.50 44.7 SINGER BD SINGER BANGLADESH LTD 184 179 369 2% 687 86% 877 28% 4.81 8.96 11.43 38.3 20.6 16.1 BRG AU GROUP LTD 8 805 50 3% 54 8% 60 10% 0.39 0.42 0.46 21.3 19.8 18.0 SODA US SODASTREAM INTERNATIONAL LTD 38 812 12 -2% 36 196% 40 11% 0.57 1.70 1.87 67.2 22.7 20.5 OSIM SP Osim 51 -50% 58 12% 63 9% 0.07 0.08 0.09 Others Average Source: Bloomberg, CICC Research

Please read carefully the important disclosures at the end of this report 23 CICC Research

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