Equity Research December 15, 2016 Haier Electronics Product competitiveness brought business improvement Investment Focus Maintain BUY Action Ticker 01169.HK Haier 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 Market cap (bn) HK$35 Reasoning Daily value (mn) HK$34.99 Haier Electronics’ home appliance business is improving. Shares outstanding (mn) 2,792 1) Product competitiveness enhanced. 2) The original sales Free float (%) 100 system managed by both Qingdao 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 refrigerators are 91 gradually targeting the high-end and customization market. (%) Value Relative 82 Casarte has become the leading brand 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 brands. High-margin Casarte and customized products contribute 10% of total (Rmb mn) 2014A 2015A 2016E 2017E washing machine 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 10,011 8,826 8,808 8,722 0.9% 1.0% 0.9% 1.0% Other current liabilities Dividend yield 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 China .................................................................................................... 6 Forward-looking deployment led by ZHANG Ruimin ................................................................ 7 Haier’s ownership structure ...............................................................................................