China / Hong Kong Company Guide

Haier Electronics Version 7 | Bloomberg: 1169 HK Equity | Reuters: 1169.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 28 Mar 2017

HOLD (Downgrade from BUY) Bright FY17 outlook priced in Last Traded Price ( 27 Mar 2017):HK$17.78 (HSI : 24,194) Price Target 12-mth: HK$18.01 (1% upside) (Prev HK$17.18) 14% share price spike priced in the positives. As of today's closing, Potential Catalyst: Higher growth in premium products and e-commerce Electronic's share price have shot up by 14% since the release of its FY16 logistics, synergistics acquisition results on 22 March 2017. We believe that the share price surge was due Where we differ: Our FY17/18 earnings estimate are 4%/3% higher to a few reasons which include: 1) clear FY17 guidance and explanation on than consensus how higher raw materials pressure could be well mitigated; 2) separate Analyst reporting of high-growth logistics business, which offer investors a better Eric YEE, CFA +86 21 6888 3360 [email protected] clarity on the company's growth driver; and 3) higher dividend payout, as Mavis HUI +852 2863 8879 [email protected] well as the potential of further uplift with practical efforts in place. We What’s New have had consistent buy call over the past one year, and the stock has now  Haier Electronic's share price shot up by c.14% post appreciated by c.45% YTD. At current level, we believe most of the FY16 results release on 22 Mar catalysts have been priced in. Downgrade to HOLD with revised TP of HKD 18.01.  We think that clear FY17 guidance, separate

reporting of high-growth logistics business, higher Key takeaways from post-result NDR in Singapore. We hosted Haier dividend payout are reasons of share price spike Electronics for post-result NDR in Singapore on 24th March 2017.  We further lift our FY17/18 earnings by 5%/7% , Management team members who presented include Mr. Simon Huang, with more insights after hosting 1169 HK for post- deputy GM of Haier Electronics, Mr. Zhan, CFO, Mr. Yu, deputy GM of

result NDR in Singapore on 24 Mar Goodaymart Logistics, as well as Ms. Betty Xu, senior finance manager. We  However, downgrade to HOLD with revised TP of met c. 30 funds in 1-on-1 and group meetings - investors are generally HKD 18.01 as positives have been largely priced in positive with the management's detailed guidance on FY17 outlook, which Price Relative include a mid-teens top-line growth target (high single-digit for channel services business, mid-teens for washing machine and water heater unit, and around 20% growth for logistics business), steady margin expansion and operating profit growth. With better clarity on sales outlook, we raised our FY17/18 earnings estimate by 5%/7%.

Keep close eyes on logistics business. While it is clear that logistics business is the fastest-growing segment, we are cognizant that the segment only accounts for c.12% of the group's revenue with low margin of 4 to 4.5%. Bearing this in mind, we remain watchful and do not rush into valuing this segment separately (A-share logistics peers valuation stand at c.40x), and Forecasts and Valuation await for more quarters of steady execution of growth plans by FY Dec (RMB m) 2015A 2016A 2017F 2018F Turnover 62,826 63,855 71,040 77,836 management, before reviewing further. This results in us keeping our EBITDA 3,398 3,767 4,324 4,838 target PE of 14x. Pre-tax Profit 3,344 3,494 4,124 4,602 Net Profit 2,703 2,786 3,233 3,585 Net Profit Gth (%) 10.5 3.1 16.0 10.9 Valuation: EPS (RMB) 0.98 1.00 1.16 1.29 We downgrade Haier Electronics from BUY to HOLD post its 45% YTD EPS (HK$) 1.11 1.13 1.31 1.45 share price gain, on revised TP of HKD 18.01, which is benchmarked EPS Gth (%) 6.4 2.1 16.0 10.9 against its average PE of 14x on FY17 fully-diluted earnings estimate. Diluted EPS (HK$) 1.07 1.10 1.28 1.42 DPS (HK$) 0.12 0.17 0.20 0.29 BV Per Share (HK$) 6.08 7.11 9.33 11.07 Key Risks to Our View: PE (X) 16.1 15.7 13.6 12.2 Further industry weakness, continued surge in raw material P/Cash Flow (X) 17.2 12.2 12.7 11.7 costs P/Free CF (X) 28.2 18.2 19.4 17.1 EV/EBITDA (X) 10.1 8.5 7.1 5.7 Net Div Yield (%) 0.6 1.0 1.1 1.6 At A Glance Issued Capital (m shrs) 2,792 P/Book Value (X) 2.9 2.5 1.9 1.6 Net Debt/Equity (X) CASH CASH CASH CASH Mkt. Cap (HK$m/US$m) 49,643 / 6,392 ROAE (%) 20.5 17.2 15.9 14.3 Major Shareholders Haier Group Corporation (%) 56.0 Earnings Rev (%): 5 7 HCH (HK) Inv. Mgmt. Co. Ltd (%) 12.1 Consensus EPS (RMB) 1.11 1.25 Free Float (%) 32.0 Other Broker Recs: B: 10 S: 0 H: 2 3m Avg. Daily Val. (US$m) 7.8 Source of all data on this page: Company, DBSV, Thomson Reuters, ICB Industry : Consumer Goods / Household Goods HKEX ASIAN INSIGHTS VICKERS SECURITIES

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Company Guide

Haier Electronics

WHAT’S NEW which all lead to similar profitability as offline distribution (vs. Key takeaways from post-result NDR intuition that online margin should be much higher). However, it is possible that online margin will be higher on scale effect -

admin expense as % of total sales will reduce, and T-mall will FY16 results & FY17 Outlook offer rebate on better sales of Haier products.

Q: Sales performance in 4Q16 was exceptional. Shall we Q: How many offline retail partners does Haier have right assume the same momentum throughout FY17? now? What is the partnership model? A: 4Q16 was good as distributors were stocking up in A: Haier has c. 7000 retail partners in the county level and preparation for the early CNY in 2017, which took place in more than 20,000 in the towns. They are mostly franchisee January. In any case, healthy sales growth of around mid- stores, but no franchisee fee involved. Haier will provide teens could be expected in FY17. annual marketing budget (c.0.5%-1% of store sales) for promotions and banner support etc. Franchisee stores Q: How much of the target sales growth would be driven by remains an important channel for Haier - it is an negative ASP & volume growth respectively? working capital business as Haier receives upfront payment A: It is anticipated that c.5% will be driven by ASP increase from the distributors. and c. 10% underpinned by volume growth.

Q: Cost pressure from raw materials is prominent in 2017. Manufacturing Business Can we tackle it well? A: Yes. Haier doesn't deal directly with raw materials increase, Q: What's the strategy for washing machine going forward? as production of modular spare parts have been outsourced A: Currently top 4 washing machine brands account for c.65% to vendors. Apart from ASP increase by launch of product of total market. Haier needs to be more proactive in the mass variants, Haier also tries to optimize product costs in every market segment going forward - Little Swan did well in stage including the designing stage, by working together recent years by gaining share from small brands. with vendor as a team. All the above could help to mitigate raw materials pressure. Q: Water heater recorded decent 16% sales growth in FY16. Is it driven more by ASP or volume growth? Q: How much CAPEX in 2017? A: Both. ASP of gas water heater is higher as compared to A: Around RMB 2bn will be set aside for CAPEX, with c.RMB electric water heater, and its volume growth in FY16 was 40% 1.3bn for capacity expansion for washing machines y-o-y. Future potentials are bright, with government's guiding production lines (esp. front-loading washing machine) and the nation towards clean energy consumption. More project c.700m for logistics segment in the form of warehouse sales are expected. construction. Q: How much capacity do we have for washing machine and Q: How would the GE integration help Haier Electronics's water heater respectively? business? A: Annual production capacity for washing machine and A: Washing machine unit could benefit from potential OEM water heater are 15-16 m units, and c. 8m units, respectively. orders from GE, however contribution is expected to be small. The CAPEX plan in FY17 involves c. 3m units capacity In terms of GE brand in-road into , kitchen appliances expansion for front-loading washing machines, with would be the focus - Haier Electronics could help to offer investment in 2 factories. one-stop distribution solution, and there will not be clash with other business such as washing machines so far. Goodaymart Logistics Business

Channel Services Business Q: What is the sales breakdown for logistics business? A: Logistics business for Haier product distribution accounts Q: Which distribution channel has higher profitability - online for 36%, e-commerce logistics accounts for 25%, household or offline? furniture logistics contributes 10% and remaining 29% A: Similar at current juncture. While 10-15% margin is comes from contract logistics services for other 3rd parties. typically given to offline franchisee stores to incentivize sales, distributing online via Tmall and JD.com involve platform fee, advertisement fee and cost to maintain dedicated teams etc.

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Company Guide Haier Electronics

Q: What is the growth driver for logistics business? A: E-commerce logistics. It consists of logistics services for T- FY17 Outlook - Guidance mall, JD.com, and e-Haier. It grew by 65% y-o-y in FY16. Going forward, it is expected to continue grow strongly at 50% Income statement Principal targets y-o-y and above - Recent data shows that volume from Tmall White goods Mid te en is still growing strongly at c.70% y-o-y, so even with further Net sales channel services high single digit rate discount on bigger volume, as well as increase in shorter- logistics 20%+ route delivery (lower ASP), e-commerce sales growth of c.50% Gross profit Gradually improve y-o-y is achievable. S &D expenses / revenue Moderate increase

Admin. expenses / revenue Decrease due to economics of scale Other interesting questions Operating profit Gradually improve

Q: Happy to see dividend payout lifted from 10% to 15%. Balance sheet Principal targets Would we see more? Working capital CCC maintained at current level A: It is possible. Dividend payout has been kept low, partially Capex / revenue 1.5% ~ 3% due to the higher withholding tax rate of 10 applied in the ％ event of payout, as most cash sit on entities in mainland Source: Company, DBS Vickers China. The group is currently optimizing the structure by setting up a related Hong Kong entity to streamline efficiency such that tax rate could be lowered to 5%, in facilitating more payout in the future. Washing machine unit's revenue breakdown - FY16

Q: Government grants were substantially higher in FY16 at domestic export c.RMB 238m vs. FY17's c.RMB 120m. Is it sustainable? A: Government grants were determined mainly based on the By region ~90 ~10 amount of investment in R&D and corresponding achievements in the particular year, so it varies. For example, onlineoffline franchise stores offline others c.RMB40m was granted in FY16 for Haier's patented water- By channel ~15 ~55 ~30 less cleaning technology in its drum washers. HaierCasarte Leader Q: There were rumors on the acquisition of water purifier business from Haier group. Is that true? By brand ~90 ~5 ~5 A: The water purifier business is a JV between Haier group and Israeli partner, and there is no concrete plan the injection front-load top-load of this business into Haier Electronics so far. By product ~45 ~55 type Q: Is it necessary to maintain two listed entities, each in Hong Kong market (1169.HK) and A-share market (600690.CH) at 0% 20% 40% 60% 80% 100% the same time? A: Overseas entity (eg. 1169 HK) is valuable - it is easier to Source: Company, DBS Vickers issue foreign debt using overseas entity and to manage incentives for foreign management.

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Company Guide

Haier Electronics

Water heater unit's revenue breakdown - FY16 Channel services unit's revenue breakdown - FY16

Third party After-sales online offline franchise stores offline others distribution servies 8% 2% By channel ~15 ~65 20 Haier online distribution HaierCasarte Leader 17%

By brand ~90 ~2 ~8

electric gas solar Haier offline By distribution product ~80 ~15 ~5 73% type

Source: Company, DBS Vickers 0% 20% 40% 60% 80% 100%

Source: Company, DBS Vickers Logistics unit's revenue breakdown - FY16 Household 10% Contract logistics & eCommerce others 25% 29%

Haier 36%

Source: Company, DBS Vickers

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Company Guide Haier Electronics

Channel services unit's business structure

Channel Services

After-sales Haier brand Third party services distribution distribution

Online Offline

Haier eHaier & Multi-brand JD Tmall others Franchise Shunguang stores store

Source: Company

Logistics unit's business structure

Logistics

Contract logistics Haier e-commerce Household & Others

Less than truck Tmall load

Contract JD logistics

eHaier & Others Shunguang

Others

Source: Company

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Company Guide

Haier Electronics

Peers valuation

Mkt 17F 18F Currency Price Cap F iscal PE P/Sales Yield P/Bk ROE PE P/Sales Yield P/Bk ROE Company Name Code Local$ US$m Yr x x % x % x x % x % Haier Electronics*^ 1169 HK HKD 17.78 6,392 Dec 13.4 0.6 1.1 1.9 15.9 12.2 0.6 1.6 1.6 14.3

Home appliance manufacturer Chigo Holding 449 HK HKD 0.122 132 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Digital# 751 HK HKD 5.28 2,068 Mar 6.8 0.3 4.7 0.8 12.9 6.0 0.3 5.2 0.7 12.9 TCL Multimedia^ 1070 HK HKD 4.23 946 Dec n.a. 0.2 1.3 1.1 5.6 n.a. 0.2 1.3 1.0 6.8 Welling Holding 382 HK HKD 1.7 627 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. HK-listed stocks average 6.8 0.3 3.0 1.0 9.2 6.0 0.2 3.2 0.9 9.8

Midea Group* 000333 CH CNY 34.15 31,864 Dec 12.3 1.2 3.3 2.6 23.0 11.0 1.1 3.6 1.8 19.4 GREE Electrical 000651 CH CNY 30.71 26,830 Dec 11.2 1.5 5.7 3.1 29.0 10.2 1.4 6.6 2.8 28.6 Elec. 600060 CH CNY 18.37 3,491 Dec 11.9 0.7 2.0 1.6 13.8 10.5 0.7 2.1 1.4 13.8 000016 CH CNY 4.53 1,584 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Qingdao Haier* 600690 CH CNY 11.65 10,317 Dec 12.4 0.5 2.4 2.1 16.9 10.4 0.5 2.9 1.8 18.2 Wuxi Little Swan 000418 CH CNY 41.35 3,798 Dec 17.7 1.3 0.6 3.5 20.9 14.4 1.1 0.0 2.9 21.3 000921 CH CNY 14.33 2,836 Dec 10.7 0.7 4.1 3.1 33.5 11.6 0.2 3.5 2.7 23.9 Sichuan 'A' 600839 CH CNY 4.38 2,936 Dec 31.3 0.3 0.7 1.3 4.4 21.9 n.a. 0.7 1.3 5.5 TCL Corp 000100 CH CNY 3.64 6,456 Dec 14.2 0.4 1.6 1.6 12.5 12.0 0.2 1.9 1.4 12.2 Hangzhou Robam 'A' 002508 CH CNY 47.4 5,026 Dec 22.8 4.8 1.5 6.5 32.4 17.9 1.2 2.2 5.3 32.2 'A' 002242 CH CNY 19.06 2,125 Dec 18.4 1.7 3.4 3.8 21.6 16.2 0.2 4.4 3.6 22.7 Huizhou China Eagle 'A' 002579 CH CNY 13.26 727 Dec n.a. n.a. n.a. n.a. n.a. n.a. 0.0 n.a. n.a. n.a. V atti 'A' 002035 CH CNY 33.13 1,749 Dec 28.1 2.2 1.4 5.7 20.4 22.8 0.5 2.2 4.9 22.5 ZJ Meida Industrial 'A' 002677 CH CNY 14.77 1,385 Dec 32.5 10.3 0.0 6.8 21.3 23.9 4.6 0.0 5.6 24.0 GD Xinbao Elect. 'A' 002705 CH CNY 18.76 1,565 Dec 20.0 1.4 1.4 3.3 18.0 16.2 0.1 1.8 2.9 19.2 ZJ Aishida Elec. 'A' 002403 CH CNY 14.55 740 Dec 27.1 1.8 1.3 2.5 9.1 23.5 0.8 1.6 2.4 10.5 SH Flyco Elect. Appc.'A' 603868 CH CNY 47.96 3,034 Dec 26.7 5.0 1.4 8.0 32.2 21.8 16.9 2.1 6.7 32.4 Zhejiang 'A' 002032 CH CNY 38.4 3,523 Dec 18.9 1.8 1.9 4.0 21.6 16.2 2.8 2.4 3.4 21.3 ZJ Haers V acuum Ctrs.'A' 002615 CH CNY 17.48 695 Dec 27.0 2.8 3.9 5.5 21.0 21.3 1.5 8.0 4.9 24.7 Kingclean Elec.'A' 603355 CH CNY 53.77 3,131 Dec 32.4 4.4 0.7 6.0 19.5 25.2 4.3 0.9 5.0 20.9 A share stocks average 20.9 2.4 2.1 3.9 20.6 17.1 2.1 2.6 3.4 20.7

# FY17: FY18; FY18: FY19

^ Core EPS

Source: Thomson Reuters, *DBS Vickers

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Company Guide Haier Electronics

CRITICAL DATA POINTS TO WATCH

Earnings Drivers: Segmental sales Washing Intersegment White goods sales momentum. Haier Electronics owns the machine sales 16% washing machine and water heater divisions of the Haier 17% Group. Its performance depends largely on the climate across Logistics the Chinese home appliance white goods industry. The Channel business company’s ICS divisional performance would also be indirectly service 8% business impacted by overall home appliance demand, as c.80% of 53% Water heater the division’s revenue is derived from distributing Haier 6% branded home appliances. Continuing market share gain of Haier products could fuel growth of distribution business. Segmental results Water heater Margin expansion possible in medium-term. On top of top- Channel 20% line expansion, margin expansion is also crucial to drive service earnings growth, on the back of consumption upgrade in business Logistics 25% business China. Haier Electronics continues to seek better product-mix 9% to enhance overall operating efficiency. By gradually scaling Washing up the proportion of its high-margin premium white goods machine that currently represents 10-20% of its manufacturing sales, 45% Intersegment the company should be on the right track to lift gross margin sales 1% over time. Source: Company, DBS Vickers

Logistics development to drive future growth. Haier Electronics's Goodaymart is a market leader in large-format logistics. The company's logistics revenue amounted to RMB7.56bn in 2016, up 15% y-o-y. Specifically, e-commerce logistics segment, which makes up a quarter of the logistics revenue, grew by more than 65% y-o-y. The company's future success would be much dependent on its ability to solidify its position as one of the largest large-format logistics/ solutions service provider in China (including after-sales services).

Strong balance sheet to potentially accelerate expansion. In a bid to become the largest and preferred large-format logistics provider, Haier Electronics needs to ensure strategic network expansion and seamless backbone integration to fully realize the scale effect and drive volume. Investments in related / complementary businesses, such as Fujian Shengfeng Logistics ( ) (58% stake acquired at c.RMB700m) 福建盛豐物流 and Sinopec Marketing ( ) (RMB1.2bn invested) 中國石化銷售 should blend with its own logistics infrastructure to effectively enhance its network reach and efficiencies. Backed by its strong net cash status, Haier Electronics also remains proactive in seeking further M&As to beef up growth.

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Company Guide

Haier Electronics

Leverage & Asset Turnover (x) Balance Sheet: Solid net cash position. Thanks to high operating cash inflow of RMB 3.5bn in FY16, Haier Electronics ended the year with more than RMB12bn net cash. Such a strong balance sheet could help to finance Haier Electronics’ spending on capacity upgrades, warehouses construction and suitable M&A opportunities, hence improving the company’s business outlook.

Share Price Drivers: Business collaborations & injections. So far, there are two Capital Expenditure business collaborations / injections anticipated for Haier Electronics. Upon successful integration of GE home appliance unit, Haier Electronics stands to benefit from potential orders from GE for the US market, as well as undertaking GE product distribution in China. Besides, albeit the timing of injecting Jushanghui.com (the B2B2C online platform under Haier group) into Haier Electronics is unknown as yet, the company’s ICS divisional revenue could be well replenished when such injection

takes place, which might serve as a significant share price driver. ROE Building the smart home appliance ecosystem. Together with the Haier Group, Haier Electronics has developed the “U+ Smart Home Platform” that enables seamless connection between different types of smart home appliances under various brands. The Haier Group is also cooperating with world-renowned brands including Microsoft, Samsung, Apple, HP and to develop the smart home platform, which could enhance Haier Electronics’, as well as the Haier Group’s overall longer-term competitiveness in smart home appliances.

Forward PE Band

x Key Risks: 40 Slower demand, raw material price fluctuations, weak property 35 30 market 25 Aside from intensifying competition, an unexpected slowdown 20 +1SD: 21.9x 15 Avg: 14.3x in the demand for white goods, fluctuations in raw material 10 prices such as steel and plastics, and potentially weakened sales 5 -1SD: 6.7x 0 trend in the property market of China that could affect on-going demand for home appliances might all influence Haier Jul-12 Jan-06 Jun-11 Oct-15 Feb-07 Apr-09 Sep-14 Dec-17 Nov-16 Mar-08 Aug-13 Electronics’ fundamental performance. May-10 PB Band Company Background: x Haier Electronics stands as the leading washing machine / water 10.0 heater manufacturer in China. Since 2010, the company has 8.0 expanded downstream to operate distribution, logistics, after- 6.0 +1SD: 4.7x sales services and e-commerce (i.e. e-Haier and collaborations 4.0 Avg: 3.2x with T-mall and JD.com, etc.) to expedite growth. 2.0 -1SD: 1.7x 0.0

Jul-12 Jan-06 Jun-11 Feb-07 Oct-15 Apr-09 Sep-14 Dec-17 Nov-16 Mar-08 Aug-13 May-10 Source: Company, DBS Vickers

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Company Guide Haier Electronics

Segmental Breakdown (RMB m)

FY Dec 2015A 2016A 2017F 2018F Revenues (RMB m) Washing Machines 14,952 15,920 18,309 19,773 Water Heaters 4,607 5,358 6,162 6,901 Channel Services Business 51,618 51,485 56,119 60,608 Logistics Business 6,579 7,562 9,074 10,889 Intersegment Eliminations (14,931) (16,471) (18,624) (20,336) Total 62,826 63,855 71,040 77,836 Segmental profit (RMB m) Washing Machines 1,363 1,522 1,794 2,076 Water Heaters 564 678 789 911 Channel Services Business 715 859 1,122 1,394 Logistics Business 228 323 408 555 Intersegment Eliminations 8 (29) (16) (12) Total 2,878 3,354 4,098 4,924 Segmental profit Margins

(%) Washing Machines 9.1 9.6 9.8 10.5 Water Heaters 12.2 12.7 12.8 13.2 Channel Services Business 1.4 1.7 2.0 2.3 Logistics Business 3.5 4.3 4.5 5.1 Intersegment Eliminations (0.1) 0.2 0.1 0.1 Total 4.6 5.3 5.8 6.3 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 67,134 62,826 63,855 71,040 77,836 Cost of Goods Sold (57,292) (52,833) (52,783) (59,247) (64,837) Gross Profit 9,842 9,993 11,072 11,793 12,999 Other Opng (Exp)/Inc (6,834) (6,841) (7,721) (7,960) (8,732) Operating Profit 3,008 3,151 3,351 3,833 4,267 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc 158 193 143 291 335 Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 3,166 3,344 3,494 4,124 4,602 Tax (651) (609) (684) (860) (978) Minority Interest (68) (32) (24) (31) (38) Preference Dividend N/A N/A N/A N/A N/A Net Profit 2,447 2,703 2,786 3,233 3,585 Net Profit before Except. N/A N/A N/A N/A N/A EBITDA 3,163 3,398 3,767 4,324 4,838 Growth Revenue Gth (%) 7.8 (6.4) 1.6 11.3 9.6 EBITDA Gth (%) 15.1 7.4 10.9 14.8 11.9 Opg Profit Gth (%) 14.5 4.8 6.3 14.4 11.3 Net Profit Gth (%) 20.1 10.5 3.1 16.0 10.9 Margins & Ratio Gross Margins (%) 14.7 15.9 17.3 16.6 16.7 Opg Profit Margin (%) 4.5 5.0 5.2 5.4 5.5 Net Profit Margin (%) 3.6 4.3 4.4 4.6 4.6 ROAE (%) 25.5 20.5 17.2 15.9 14.3 ROA (%) 9.9 9.4 8.4 8.5 8.5 ROCE (%) 19.9 16.2 14.8 13.9 12.7 Div Payout Ratio (%) 9.7 10.4 15.3 15.0 20.0 Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Vickers

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Company Guide

Haier Electronics

Balance Sheet (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 2,148 3,119 3,309 4,704 5,481 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 1,563 3,891 4,343 4,850 5,190 Cash & ST Invts 10,930 10,244 12,596 14,369 16,278 Inventory 3,668 4,399 5,183 3,084 3,375 Debtors 8,860 8,335 10,186 11,883 13,017 Other Current Assets 347 309 532 1,250 1,029 Total Assets 27,515 30,297 36,149 40,140 44,370

ST Debt 25 123 110 265 267 Creditors 12,360 12,307 15,421 14,758 15,794 Other Current Liab 736 572 1,785 561 561 LT Debt 776 0 0 0 0 Other LT Liabilities 1,516 1,573 463 554 590 Shareholder’s Equity 11,490 14,843 17,539 23,009 27,285 Minority Interests 612 879 831 993 (127) Total Cap. & Liab. 27,515 30,297 36,149 40,140 44,370

Non-Cash Wkg. Capital (221) 164 (1,305) 898 1,066 Net Cash/(Debt) 10,129 10,122 12,486 14,104 16,011 Debtors Turn (avg days) 48.8 49.9 52.9 56.7 58.4 Creditors Turn (avg days) 76.8 85.6 96.6 93.7 86.8 Inventory Turn (avg days) 21.0 28.0 33.4 25.7 18.3 Asset Turnover (x) 2.7 2.2 1.9 1.9 1.8 Current Ratio (x) 1.8 1.8 1.6 2.0 2.0 Quick Ratio (x) 1.5 1.4 1.3 1.7 1.8 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 75.3 805.6 1,079.8 449.3 445.2 Z-Score (X) 5.0 4.6 4.6 4.6 4.5 Source: Company, DBS Vickers

Cash Flow Statement (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 3,166 3,344 3,494 4,124 4,602 Dep. & Amort. 155 247 416 491 571 Tax Paid (835) (582) (684) (860) (978) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 244 (314) 479 (261) (389) Other Operating CF 173 (164) (111) (49) (50) Net Operating CF 2,903 2,530 3,594 3,445 3,756 Capital Exp.(net) (604) (990) (1,190) (1,190) (1,188) Other Invts.(net) 0 27 27 27 28 Invts in Assoc. & JV 0 201 201 201 201 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 264 (2,078) 36 (149) (144) Net Investing CF (340) (2,839) (926) (1,111) (1,103) Div Paid (213) (253) (425) (485) (717) Chg in Gross Debt (180) (59) 928 928 928 Capital Issues 1,123 676 0 0 0 Other Financing CF 1,419 (766) (897) (958) (955) Net Financing CF 2,149 (402) (394) (514) (744) Currency Adjustments 8 (22) 78 0 0 Chg in Cash 4,720 (733) 2,352 1,820 1,909 Opg CFPS (RMB) 1.00 1.03 1.12 1.33 1.49 Free CFPS (RMB) 0.87 0.56 0.86 0.81 0.92

Source: Company, DBS Vickers

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Company Guide Haier Electronics

Target Price & Ratings History

S.No. Date Closing 12-mth Rating HK$ 9 Price Target 19.0 Price 18.0 2 1: 11-May-16 HK$12.28 HK$17.38 Buy 5 7 17.0 4 8 2: 10-Aug-16 HK$13.78 HK$16.33 Buy 6 16.0 3: 1-Sep-16 HK$12.98 HK$16.33 Buy 15.0 3 4: 2-Nov-16 HK$12.36 HK$16.33 Buy 5: 21-Nov-16 HK$12.84 HK$16.02 Buy 14.0 1 13.0 6: 22-Nov-16 HK$12.84 HK$16.02 Buy 7: 11-Jan-17 HK$13.62 HK$16.02 Buy 12.0 8: 21-Feb-17 HK$14.4 HK$16.02 Buy 11.0 9: 23-Mar-17 HK$15.64 HK$17.18 Buy 10.0 Jul-16 Jan-17 Jun-16 Oct-16 Feb-17 Sep-16 Apr-16 Dec-16 Nov-16 Mar-17 Mar-16 Aug-16 May-16

Source: DBS Vickers Analyst: Eric YEE, CFA

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Company Guide

Haier Electronics

DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 28 Mar 2017 09:23:02 (HKT) Dissemination Date: 28 Mar 2017 16:32:44 (HKT)

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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBSVS and DBSVHK, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

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Company Guide Haier Electronics

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.

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Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

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Company Guide

Haier Electronics

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