Haier Electronics Version 7 | Bloomberg: 1169 HK Equity | Reuters: 1169.HK Refer to Important Disclosures at the End of This Report
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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, Haier 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 sa- AH 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 China, 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.