Haier Electronics Group [1169.HK] - jrj.com.cnpg.jrj.com.cn/acc/Res/HK_RES/STOCK/2014/6/3/0a...Haier Electronics Group [1169.HK] Haier is a leading white goods manufacturer and an

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Haier Electronics Group [1169.HK]

Haier is a leading white goods manufacturer and an integrated channel service (ICS) provider.

However, heavy reliance on Haier brand distribution (84% of ICS revenue) will likely become a

growth drag for the company and we expect Haier to struggle to expand its third-party brand

distribution profile. We also believe the market has over-priced the effect of Alibaba as the

contribution from Alibaba, on our estimates, is still limited in the short term. We believe the current

valuation of 16.9x 2014E PER is unattractive, compared to our earnings forecast of

14.4%/14.9%/15.2% over 2014-2016E. Our target price of HK$16.09 is based on a sum of the parts

(SOTP) valuation, and implies 15x/13x PER for our 2014E/2015E forecast, implying 11.3%

potential downside. Our earnings estimates for 2014E/2015E are 4.8%/10.7% below consensus.

Long way to transform from a Haier-brand major distributor. After several years of

restructuring, Haier’s ICS gross revenue contribution was up from 13% in 2009 to 76% in

2013 (38% of segment profit due to lower ICS margin). 84% of ICS revenue came from the

Haier brand in 2013, and the plan is to introduce more third-party brands to diversify its

distribution product profile, but we expect it will be a rocky road as competing brands are

less likely to use Haier’s distribution channel. We estimate the revenue contribution from

non-Haier brands to ICS will increase slowly from 16% in 2013 to 22.5% in 2015E.

Limited contribution from logistics, even with Alibaba. In 2013, the logistics business

contribution to net profit is estimated at about 7.1%. As the majority of logistics revenue

came from Haier products, we expect earnings growth could be limited, and continue to be a

small earnings contributor in 2015E. At the same time, we estimate the logistics segment

profit contribution from Alibaba will only account for 0.8%/1.9% of our 2014E/2015E

estimates. Partnered with China’s largest eCommerce player, we believe the cooperation

will bring huge potential growth for Haier but the contribution is still limited in near term.

Weak property market; absence of subsidies affect home appliance sales. The

slowdown in China’s property market, reflected in the 8.6% drop in cumulative floor area

sold for residential housing in 4M14, will have an impact on home appliance sales, in our

view, given the correlation with the property market. At the same time, the home appliance

penetration rate reached a high level after the long subsidy programs in 2007-2013,

reaching excessive demand levels, and we believe this is likely to moderate in the coming

years. Therefore, we are cautious on revenue growth for Haier’s white goods, and expect

only 5.5%/5.7% revenue growth for the company’s manufacturing segment in 2014E/2015E

– this will become a growth drag on Haier’s earnings.

Key upside risks: 1) Strong net cash position may indicate M&A opportunities; 2) stronger than

expected economic recovery, leading to improvement of property and home appliance sales; 3)

more 3rd party brands than expected choose to use Haier’s distribution channel. Vickie Lau —Analyst

(852) 3698-6321

[email protected]

John Mulcahy—Head of Research

(852) 3698-6889

[email protected]

Consumer Sector Valuation looks full with flat growth - Initiate with SELL

SELL

Close: HK$18.14 (May 30, 2014)

Target Price: HK$16.09 (-11%)

Share Price Performance

Market Cap US$6,260m

Shares Outstanding 2,675m

Auditor Ernst and Young

Free Float 41%

52W range HK$10.42-24.90

3M average daily T/O US$13.9m

Major Shareholding Haier Group

(58.7%)

June 3, 2014

Key Financials (RMBm) 2012 2013 2014E 2015E 2016E

Turnover (RMBm) 55,615.0 62,263.2 68,250.1 76,088.3 85,293.7

Change (YoY) 11.0% 12.0% 9.6% 11.5% 12.1%

Net profit (RMBm) 1,695.1 2,036.9 2,330.8 2,679.0 3,086.7

Change (YoY) 20.4% 20.2% 14.4% 14.9% 15.2%

Net margin 3.0% 3.3% 3.4% 3.5% 3.6%

Basic EPS (RMB) 0.71 0.80 0.92 1.05 1.21

Change (YoY) 15.6% 13.3% 14.4% 14.9% 15.2%

Diluted EPS (RM B) 0.64 0.76 0.87 1.00 1.15

Change (YoY) 16.7% 18.7% 14.4% 14.9% 15.2%

PER (x) 22.9x 19.3x 16.9x 14.7x 12.8x

PBR (x) 6.0x 4.6x 3.3x 2.6x 2.2x

Yield 0.4% 0.5% 0.6% 0.7% 0.8%

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We initiate coverage of Haier with a SELL rating; our target price of HK$16.09 is based on a SOTP valuation of 2014E earnings and takes into account the growth profile of different business segments. We expect ICS will become the key profit contributor and account for about 50% of segment profit in 2016E. We estimate EPS will grow by 14.4%/14.9%/15.2% over 2014-2016E. We used a 10x target PER for the manufacturing business by applying a 30% premium to the average valuation for its home appliance peers. We used a 22x target PER for the ICS business, similar to the acquisition price of QHL by Alibaba (30.6x 2013E PER and 24.3x 2014E PER based on our estimates), which implies a ~35% premium to the average valuation of distribution and logistics plays. Our target price of HK$16.09 implies a PER of 15x/13x for our 2014E/2015E earnings forecast, with 11.3% potential downside.

Valuation

Our target price of HK$16.09 implies a PER of 15x/13x for 2014E/2015E

Figure 2: Peer comparison

Sources: Bloomberg, Company, CGIHK Research

Figure 1: Target price summary

Sources: Company, CGIHK Research

Figure 3: Haier forward PER band


Figure 4: Haier forward PBR band


SOTP

Net profit 2014E

(RMBmn)

Targeted

P/E (x)

Valuation

(RMB mn)

Equity value

(HKD)

Net profit contribution from manufacturing 1,362.4 10.0 13,624.0 6.28

Net profit contribution from ICS 968.4 22.0 21,303.9 9.81

Total 2,330.8 34,927.9 16.09

-

5.00

10.00

15.00

20.00

25.00

30.00

8x PER 16x PER 22x PER Stock Price

-

5.00

10.00

15.00

20.00

25.00

30.00

2x PBR 3.5x PBR 5x PBR Stock Price

Ticker Company Price (LC) 2013 2014E 2015E 2013 2014E 2015E 2014E 2015E Yield (%)

1169 HK Equity HAIER ELECTRONIC 18.14 6,222 19.3 16.9 14.7 4.6 3.3 2.6 14.4% 14.9% 0.6

600690 CH Equity QINGDAO HAIER-A 15.05 6,510 9.4 8.6 7.5 2.6 2.2 1.8 14.0% 15.2% 3.1

Home appliance

751 HK Equity SKYWORTH DIGITAL 3.70 1,343 6.3 6.7 5.6 1.0 1.0 0.8 1.3% 18.0% 5.3

1070 HK Equity TCL MULTIMEDIA T 2.59 443 n/a 13.0 8.3 0.8 0.7 0.7 n/a 56.8% n/a

449 HK Equity CHIGO HOLDINGS 0.17 1,425 5.8 4.5 4.5 0.4 0.4 0.4 25.0% 0.0% n/a

921 HK Equity HISENSE KELON -H 8.80 1,768 7.8 6.4 5.2 3.5 n/a n/a 21.2% 22.9% n/a

Average 6.6 7.6 5.9 1.4 0.7 0.6

Distribution and logistics

493 HK Equity GOME ELECTRICAL 1.30 2,830 19.8 14.3 12.3 1.1 1.1 1.0 37.7% 16.4% 2.0

598 HK Equity SINOTRANS LTD-H 4.36 2,375 17.6 13.8 11.6 1.4 1.3 1.2 27.0% 18.9% 1.4

636 HK Equity KERRY LOGISTICS 12.30 2,666 8.8 20.4 18.0 1.5 1.4 1.3 -57.0% 13.3% 0.9

Average 15.4 16.2 14.0 1.3 1.3 1.2

Market Cap

(USD m)

PER (x) Earnings growthPBR (x)

3

Restructured to be the leading distribution and logistics player. Haier took over the integrated channel service (ICS) business unit from Haier Group in 2010. ICS consists of four parts - 1) Distribution; 2) logistics; 3) after-sale service; and 4) other complementary channel business. The revenue CAGR for the ICS segment was about 25% in 2010-2013, thanks to decent demand for white goods sales under the home appliance subsidy program and continuous growth of home appliance penetration into rural areas. ICS continued to be the growth driver and the segment contribution grew continuously. In 2013, ICS accounted for 75.6% of the group's gross revenue and 37.2% of segment profit.

(1) Distribution – Long way to transform from Haier brand to 3rd party brand

Haier brand will still be the main contributor to ICS. In 2013, about 84% (~87% in 2012) of ICS revenue came from the Haier brand. Haier has introduced foreign brands like LG and Panasonic, or local brands like Skyworth, Wai Hong and Little Duck. However, only 16% of ICS revenue contribution was from non-Haier brands in 2014. The company intends introducing more third-party brands into the distribution network but we believe the prospects are limited as many domestic home appliance manufacturers have their own distribution networks and would not use a competitor’s distribution channel. We believe the cooperation with black goods brands and foreign brands will be easier due to different target customers. We expect the revenue from non-Haier brand will grow at the CAGR of 32.1% over 2014-2016E and will account for 22.5% of ICS revenue and 8.3% of segment profit in 2015E.

Integrated Channel Service – Segment background

Figure 5: ICS—accounted for 75% of gross revenue in 2013 Figure 6: ICS—accounted for 37% segment profit

Sources: Company, CGIHK Research Sources: Company, CGIHK Research

Figure 7: Other white goods peers also operate their exclusive stores


16% of ICS revenue came from non-Haier brands

Washing machine

45%

Water heater 17%

Integrated channel services

(ICS)38%

Washing machine

19%

Water heater

6%Integrated channel services

(ICS)75%

Haier Gree Midea

No. of exclusive stores (FY 2013) ~38,000 ~20,000 ~16,000

Business model (majority) Franchised Franchised Franchised

4

Most of Haier/Goodaymart stores are operated under franchised /JV models with local partners, with store set –up and format designs standardized to enhance uniformity. In 2013, Haier had ~8,000 Haier Community Stores, >30,000 Haier Exclusive Stores and 2,800 Goodaymart Stores.

(2) Logistics – Limited earnings contribution, even with Alibaba

Limited earnings contribution from logistics. The revenue and net profit contribution from the logistics segment were estimated at about 5% and 7.1% respectively in 2013. We expect the revenue from logistics will grow by a CAGR of 22.4%, mainly supported by the growth of non-Haier brand. We estimate the operating profit contribution from logistics will only be 8.8% in 2015E, still a

small part of overall earnings.

Figure 8: Examples of third-party brands Figure 9: Non-Haier brands contribution to ICS


Figure 10: Haier’s store profiles


Figure 11: Revenue and net profit from logistics (RMBmn) Figure 12: Revenue and net profit contribution from logistics


Note 1: Some of the historical figures are based on our estimates

2,606.0 2,899.0

3,100.0

113.9 127.6 144.0

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

2011 2012 2013

Logistics revenue Logistics net profit

5.2% 5.2%5.0%

8.1%7.5%

7.1%

4.0%

6.0%

8.0%

10.0%

2011 2012 2013

Logistics contribution to revenue

Logistics contribution to net profit

10.0%

12.8%

16.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2011 2012 2013

Non-Haier contribution to ICS

Brand name Products No. of stores Feature

Haier Community Store Haier brand only ~8,000 Located in top tier city communities

Haier Exclusive Store Haier brand only ~30,000 Sell full suite of Haier branded products

Goodaymart Haier and non-Haier brand ~2,800 Sell international and domestic brands

5

Huge potential from cooperation with Alibaba, but too early to see. The revenue contribution from Alibaba was about RMB80m in 2013 (~2.6% of logistics revenue) and management expects the logistics revenue contribution from Alibaba will be about RMB300-400m in 2014E and RMB1,000m in 2015E. By assuming an operating margin of 6.5%/6.8%, the logistic segment profit contributions from Alibaba are estimated to be 0.8%/1.9% of our 2014E/2015E estimates. We believe the cooperation with Alibaba will bring a huge potential

growth for Haier but the contribution is still limited in near term.

How is the cooperation with Alibaba? Goodaymart takes large-item orders

from Tmall through the orders in Wuliubao (物流宝), an integrated logistics

platform developed by Alibaba. Wuliubao introduces a long list of domestic and foreign logistics players; third-party Tmall store operators select the logistics service providers according to their business needs and locations. Some major China courier service providers like SF Express, Shentong Express and YT Express are also on the list. According to the prospectus of Alibaba, as of March 2014 it works with 14 strategic delivery partners.

Logistics flows and features. Tmall store operators select the delivery partner upon a customer order. The selected delivery company will then pick up the package from the seller and send directly to the buyer. The package status details are uploaded and updated on a real-time basis. The buyer can also provide after-sale feedback to the delivery company.

Only 1.9% profit contribution from Alibaba in 2015E based on our estimates

There are 14 delivery partners of Alibaba

Figure 13: Logistics process adopted by Alibaba

Sources: Alibaba’s prospectus, CGIHK Research

Figure 14: Many leading courier service providers are on the list of Tmall logistics

Sources: Tmall, CGIHK Research

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Compared with other courier service providers, Goodaymart positions itself as a large-item logistics player and its name is under the categories of “large-items delivery” and “home installation” logistics services and is regarded as a “premium service provider” by Tmall logistics.

The daily capacity of Goodaymart logistics service is estimated to be 100-130k units per day. In Dec 2013, Haier expanded its logistics capacity by acquiring Shanghai Boyol (a logistics player specializing in furniture and sanitary ware delivery) through a 60% controlling interest in JV for a consideration of RMB86m. We expect the company will continue to expand its logistics capability by further acquisitions.

According to Alibaba’s prospectus, the combined GMV (Gross Merchandise Volume) done by three major Alibaba’s platforms (Taobao marketplace, Tmall and Juhuasuan) in 2013 was about RMB1,542bn, equivalent to about 6.6% of total consumption in China. According to local media, on 11 November 2013, Tmall’s total daily turnover reached RMB35bn, up 83% YoY. Sales of home appliances reached RMB1.45bn, up 300% YoY, and accounted for 4.14% of daily turnover of the whole platform.156m packages were handled through Alibaba on Singles Day. By comparison, Goodaymart handled about 500,000 packages for Singles Day, according to local media reports, equivalent to 0.32% of total packages handled by Alibaba.

Goodaymart positions itself as a large-item logistics player

Figure 15: Goodaymart is under the categories of “Large items delivery” and “home installation service”

Sources: Tmall, CGIHK Research

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Figure 16: Shareholding structure under the strategic agreement with Alibaba


Figure 17: Shareholding structure under the strategic agreement with Alibaba


No. of shares

(Mn) %

No. of shares

(Mn) %

No. of shares

(Mn) %

Qingdao Haier Investment and Development Co., Ltd & Subsidiary 346 13.5% 346 13.2% 346 12.9%

Qingdao Haier Co., Ltd. 393 15.3% 393 15.0% 393 14.6%

Haier Shareholdings (Hong Kong) Limited 832 32.4% 832 31.8% 832 30.9%

Alibaba SPV - 0.0% 52 2.0% 124 4.6%

Other public shareholders 996 38.8% 996 38.0% 996 37.0%

2,567 100.0% 2,619 100.0% 2,691 100.0%

As at the date of

annoucement

Immediately upon completion of

the share subscription

Upon full exercise of conversion

rights on maturity

Strategic agreement with Alibaba. To recap, Haier Electronic entered a strategic agreement with Alibaba in December 2012 which raised market attention. Under the agreement, Alibaba will become a strategic investor and it will hold 9.9% of Qingdao Haier Logistics (QHL) and 2% of Haier Electronic (1169.HK). Alibaba will invest HK$2.82bn in the form of 1) HK$1.32bn of convertible and exchangeable bonds which can be converted into either 2.6% Haier Electronic at HK$19.334/share or exchanged to 24.1% of QHL subject to government approval; 2) HK$0.54bn for 9.9% of QHL and 3) HK$0.96bn for the subscription of 2% new share of Haier Electronic at HK$18.413/share. The proceeds will be used for expanding and upgrading its warehouse capacity, “last mile” network development and other O2O integration development and other potential acquisition in logistics. The acquisition price implied a valuation of HK$5.46bn for QHL or 5.3x historical PBR based on QHL interim 2013 net asset value or 30.6x PER based on 2013E earnings.

8

(4) Manufacturing – Dominant player under industry slowdown

No. 1 in domestic washing machine market facing industry slowdown. Haier has more than a quarter of the whole China washing machine market, with market share about 28% in 2013, followed some way behind by "Little Swan" (14% market share). In 2013, washing machine revenue grew by 7.1% to RMB14,222m, with about 9% of sales exported, mainly to Europe, South and North America and Southeast Asia. Washing machines are still the key revenue (19.4% of 2013 revenue) and profit contributor (47.2% of 2013 EBIT) but the contribution has declined in past few years.

Largest domestic market player in water heaters by volume. Haier

continues to rank first by sales volume in the domestic water heater market, with

market share of 18.3% in 2013, down 1.6% from 2012. The decline was

because consumers preferred gas water heaters and solar water heaters under

the previous energy-saving subsidy program but most of Haier's water heaters

are electronic (~80%) and revenue growth was affected. Haier’s water heater

revenue dropped 2.9% to RMB4,358m in 2013 due to a restructuring of the

water heater network development function in tier 3-4 cities from water heater

unit to the integrated channel service business unit. After excluding the business

structure adjustment effect, the comparable revenue of water heater business

would have grown by approximately 11%.

Figure 18: Haier took 28% domestic market share of washing machine Figure 19: Haier’s market share in recent years

Sources: China Market Monitor, CGIHK Research Sources: China Market Monitor, CGIHK Research

31.5% 31.5%

26.9% 27.0%

31.2%28.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2008 2009 2010 2011 2012 2013

Domestic market share of washing machine

Figure 20: Haier took 18% domestic market share of water heater Figure 21: Haier’s market share in recent years

Sources: China Market Monitor, CGIHK Research Sources: China Market Monitor, CGIHK Research

21.3% 20.3% 20.3%

27.1%

19.9%18.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2008 2009 2010 2011 2012 2013

Domestic market share of water heater

Haier, 18%

A.O.Smith, 15%

Midea, 12%

Vanward, 9%

Macro, 9%

Whirlpool, 5%

Ariston, 3%

Vatti, 3%

Rinnai, 3%

Noritz, 3%

Others, 19%

Haier28%

Little Swan14%

Sanyo9%

Panasonic7%

Siemens7%

Midea5%

Electrolux4%

TCL3%

LG3%

Samsung3%

Others18%

9

Manufacturing cost structure. We estimate raw materials like steel, copper and plastic account for the majority (~90%) of cost of goods sold, and labor cost accounts for less than 10% of COGS. The company could maintain stable gross margin in the washing machine and water heater segments over the years. The decline in gross margin on water heaters in 2013 was due to a change of ac-counting booking of certain network development functions to ICS. We expect the company to maintain a stable gross margin by improving its product portfolio to tackle the increasing trend of raw material and labor cost.

Weak property market and absence of subsidies affect home appliance sales. According to the China Market Monitor, it is estimated that the growth rate of the washing machine and water heater market will decline from mid-teens to 4.7% and 9.8% respectively in 2014. Based on historical data, the growth rate of home appliances usually follows the trend of property sales, with a time lag of 3-12 months. China’s property market has been weakening and the cumulative floor area sold of residential housing dropped by 8.6% in 4M14. We worry that the revenue growth of Haier’s WM and WH will be negatively affected by the property market slowdown.

Time lag of 3-12 months between property sales & home appliance sales, further home appliance mar-ket deterioration possible.

Figure 22: GFA sold of residential housing and domestic Figure 23: GFA sold for residential housing and domestic sales

sales of washing machine of air conditioner

Sources: Wind, Chinaiol, NBS, CGIHK Research Sources: Wind, Chinaiol, NBS, CGIHK Research

Figure 24: GFA sold of residential housing and domestic Figure 25: GFA sold for residential housing and domestic sales

sales of refrigerators of home appliance and AV equipment

Sources: Wind, Chinaiol, NBS, CGIHK Research Sources: Wind, Chinaiol, NBS, CGIHK Research

-6%

1%

-40%

-20%

0%

20%

40%

60%

80%

100%

GFA sold for residential housing YoY (LHS)

Domestic sales of washing machine YOY (RHS)

-6%

22%

-40%

-20%

0%

20%

40%

60%

80%

100%


Domestic sales of AC YOY (RHS)

-6%

-7%

-40%

-20%

0%

20%

40%

60%

80%

100%


Domestic sales of refrigerators YOY (RHS)

-6%

6%

-40%

-20%

0%

20%

40%

60%

80%

100%


Sales of Home app. and AV equ. YOY (RHS)

10

Figure 26: Washing machine’s penetration rate improved from 2006 to 2012

Sources: Wind, NBS, CGIHK Research

After a long period of home appliance subsidies in 2007 to 2013, the average washing machine/refrigerator penetration rate in China rose from 48%/29% in 2006 to 73%/71% in 2012. We do not expect the penetration rate to increase as fast as the previous period due to the absence of subsidies and a long replace-ment cycle for general home appliances. We believe home appliance demand was already inflated by subsidies, and sales of home appliances are likely to slow in the coming years.

0%

20%

40%

60%

80%

100%

2006 2012

Figure 27: Refrigerator's penetration rate improved from 2006 to 2012

Sources: Wind, NBS, CGIHK Research

0%

20%

40%

60%

80%

100%

2006 2012

11

Financial forecast. We expect the company’s revenue will grow by 9.6%/11.5% in 2014E/2015E. We forecast the revenue growth of manufacturing will slow down to 5.5%/5.7% in 2014E/2015E, and ICS growing 10.7%/11.9% in 2014E/2015E. We estimate the contribution of non-Haier brands (excluding Alibaba) to ICS will increase from 16% to 22.5% in 2015E.

Earnings forecasts

Figure 28: Revenue breakdown



2011 2012 2013 2014E 2015E 2016E

Revenue (RMB mn)

Washing machine 12,214.9 13,277.3 14,221.9 14,933.0 15,679.7 16,620.5

Water heater 3,828.3 4,489.5 4,357.7 4,662.7 5,035.7 5,438.6

Integrated channel services (ICS) 45,377.4 50,768.6 57,567.8 63,743.0 71,323.7 80,220.2

Intersegment elimination (11,330.7) (12,920.3) (13,884.2) (15,088.7) (15,950.8) (16,985.4)

Total 50,089.9 55,615.0 62,263.2 68,250.1 76,088.3 85,293.7

Revenue Growth YoY

Washing machine 6.0% 8.7% 7.1% 5.0% 5.0% 6.0%

Water heater 22.5% 17.3% -2.9% 7.0% 8.0% 8.0%

Integrated channel services (ICS) 55.1% 11.9% 13.4% 10.7% 11.9% 12.5%

Total 36.1% 11.0% 12.0% 9.6% 11.5% 12.1%

Breakdown of ICS

Haier brand 40,839.7 44,270.2 48,289.7 51,187.1 54,258.4 57,513.9

non-Haier brand 4,537.7 6,498.4 9,198.0 12,155.9 16,065.4 21,206.3

Alibaba 0.0 0.0 80.0 400.0 1,000.0 1,500.0

Total 45,377.4 50,768.6 57,567.8 63,743.0 71,323.7 80,220.2

ICS Revenue Growth YoY

Haier brand n/a 8.4% 9.1% 6.0% 6.0% 6.0%

non-Haier brand (excluding Alibaba) n/a 43.2% 41.5% 32.2% 32.2% 32.0%

Total n/a 11.9% 13.4% 10.7% 11.9% 12.5%

Contribution of Haier brands to ICS 90.0% 87.2% 83.9% 80.3% 76.1% 71.7%

Contribution of non-Haier brands to ICS 10.0% 12.8% 16.0% 19.1% 22.5% 26.4%

Contribution of Alibaba to ICS 0.0% 0.0% 0.1% 0.6% 1.4% 1.9%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

12

Stable gross margin and improving operating margin. We expect the gross profit margin of WH and WH will be stable at 27.3% and 35.5% respectively and expect GM of ICS will improve slightly to 8.8% in 2015E given a more diversified product mix. EBT margin will likely to improve due to economies of scale and cost saving on S&D.

Figure 29: Revenue breakdown


2011 2012 2013 2014E 2015E 2016E

Gross margin

Washing machine 27.8% 27.8% 27.3% 27.3% 27.3% 27.3%

Water heater 41.9% 43.0% 35.5% 35.5% 35.5% 35.5%


Segment margin

Washing machine 7.3% 8.3% 8.7% 8.8% 8.9% 9.0%

Water heater 10.0% 11.1% 11.0% 11.3% 11.7% 11.8%


Net margin 2.8% 3.0% 3.3% 3.4% 3.5% 3.6%

Figure 31: Improving OM of ICS due to higher contribution from

Figure 30: Improving GM of ICS due to economies of scale logistics



27.8% 27.8% 27.3% 27.3% 27.3% 27.3%

41.9% 43.0%

35.5% 35.5% 35.5% 35.5%

7.3% 8.2% 8.2% 8.5% 8.8% 9.1%

2011 2012 2013 2014E 2015E 2016E

GM of washing machine

GM of water heater

GM of intergrated channel service (ICS)

7.3%8.3% 8.7% 8.8% 8.9% 9.0%

10.0%

11.1% 11.0% 11.3% 11.7% 11.8%

1.6% 1.4% 1.8% 2.1% 2.3% 2.5%

2011 2012 2013 2014E 2015E 2016E

OM of washing machine

OM of water heater

OM of Integrated Channel Service (ICS)

Earnings forecasts (Cont’)

13

Contribution Mix. We expect ICS will become the company’s core profit contributor in 2016E.

Figure 32: Breakdown of segment profit



Figure 33: Gross revenue breakdown Figure 34: ICS will contribute about half of segment profit in 2016E


19.9% 19.4% 18.7% 17.9% 17.0% 16.3%

6.2% 6.6% 5.7% 5.6% 5.5% 5.3%

73.9% 74.1% 75.6% 76.5% 77.5% 78.4%

2011 2012 2013 2014E 2015E 2016E

Washing machine Water heater Integrated channel services (ICS)

44.2% 47.2% 44.8% 41.7% 38.5% 35.9%

18.9%21.4%

17.3%16.7%

16.3%15.4%

36.9% 31.4%37.9% 41.5% 45.2% 48.6%

2011 2012 2013 2014E 2015E 2016E

washing machine water heater Integrated channel service (ICS)


2011 2012 2013 2014E 2015E 2016E

Segment profit (RMB mn)

Washing machine 896.4 1,105.3 1,240.6 1,314.1 1,395.5 1,495.8

Water heater 382.4 500.1 479.1 526.9 589.2 641.8

Integrated channel services (ICS) 747.1 735.5 1,050.4 1,308.5 1,637.1 2,024.8

Total 2,025.9 2,340.8 2,770.2 3,149.5 3,621.8 4,162.4

Growth of Segment profit YoY

Washing machine 1.8% 23.3% 12.2% 5.9% 6.2% 7.2%

Water heater 19.4% 30.8% -4.2% 10.0% 11.8% 8.9%

Integrated channel services (ICS) 64.3% -1.6% 42.8% 24.6% 25.1% 23.7%

Total 22.4% 15.5% 18.3% 13.7% 15.0% 14.9%

Contribution of segment profit

Washing machine 44.2% 47.2% 44.8% 41.7% 38.5% 35.9%

Water heater 18.9% 21.4% 17.3% 16.7% 16.3% 15.4%


Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Segment profit contribution of Haier brand 1,951.2 2,246.7 2,597.9 2,877.0 3,194.2 3,537.7

Segment profit contribution of non-Haier brand 74.7 94.1 167.3 246.7 359.9 518.6

Segment profit contribution of Alibaba - - 4.9 25.9 67.8 106.1

Total 2,025.9 2,340.8 2,770.2 3,149.5 3,621.8 4,162.4

Segment profit contribution of Haier brand 96.3% 96.0% 93.8% 91.3% 88.2% 85.0%

Segment profit contribution of non-Haier brand 3.7% 4.0% 6.0% 7.8% 9.9% 12.5%

Segment profit contribution of Alibaba 0.0% 0.0% 0.2% 0.8% 1.9% 2.5%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

14

Improving working capital and strong net cash position. For manufacturing units, the bills and trade receivables turnover was 76 days in 2013 (2012: 107 days), with the sharp decline due to the increase in the cash settlement proportion for washing machine and water heater businesses by ICS. The receivable days for ICS are usually lower as most customers are on cash on delivery payment terms (2013: 24 days). With a higher projected contribution from ICS, we expect working capital management will be further improved. We also expect Haier will have a net cash position of RMB12.3bn by 2016E, from RMB5.9bn in 2013. With a strong net cash position, we expect Haier may further increase its value-added service capability by acquiring other logistics service providers after the formation of the JV with Boyol.

Rising CAPEX. We expect Haier’s capex will increase to RMB1,200m in 2014E, of which about RMB1,000m will be spent on channel development including warehouse expansion/upgrade and IT development. We assume capex will then normalize to RMB1,000m in 2015E/2016E.

Figure 35: Haier is likely to maintain a stable working capital Figure 36: Strong net cash on hand


(30.0)

(10.0)

10.0

30.0

50.0

2011 2012 2013 2014E 2015E 2016E

Receivable turnover days Payable turnover days

Inventory days Working capital cycle

0.0

4,000.0

8,000.0

12,000.0

16,000.0

2011 2012 2013 2014E 2015E 2016E

Net Cash Position (RMBmn)


15

Profit & loss (RMBm) 2012 2013 2014E 2015E 2016E Cash flow (RMBm) 2012 2013 2014E 2015E 2016E

Revenue 55,615.0 62,263.2 68,250.1 76,088.3 85,293.7 Profit before tax 2,244.3 2,637.8 3,018.4 3,469.4 3,997.3

COGS (46,673.9) (53,125.6) (58,212.3) (64,975.0) (72,899.1) Depreciation and amortization 106.1 121.6 166.1 231.6 291.9

Gross profit 8,941.2 9,137.5 10,037.8 11,113.2 12,394.6 Change in w orking capital (427.3) 92.8 359.8 (159.0) (132.1)

Other income and gains 106.3 203.9 146.6 196.0 217.7 Other operating cash f low (183.0) (642.2) (542.8) (636.4) (746.0)

Selling and distribution expenses (4,569.5) (4,404.0) (4,703.0) (5,150.0) (5,663.8) Operating cash flow 1,740.2 2,210.0 3,001.6 2,905.6 3,411.1

Administrative expenses (2,152.5) (2,221.4) (2,372.3) (2,597.7) (2,856.9) CAPEX (467.6) (507.3) (1,200.0) (1,000.0) (1,000.0)

Operating profit 2,325.4 2,716.1 3,109.1 3,561.5 4,091.5 Proceeds from disposals 4.5 1.3 (9.7) (5.6) (5.4)

Finance income 0.0 0.0 0.0 0.0 0.0 Other investing cash f low 23.0 (301.0) 0.0 0.0 0.0

Financial costs (64.5) (68.3) (83.7) (83.7) (83.7) Investing cash flow (440.1) (807.0) (1,209.7) (1,005.6) (1,005.4)

Other non-operating expenses (16.7) (9.9) (6.9) (8.4) (10.5) Net proc. from bank & other loans 14.8 119.8 0.0 0.0 0.0

Profit before tax 2,244.3 2,637.8 3,018.4 3,469.4 3,997.3 Share issue 82.9 172.5 1,200.0 0.0 0.0

Tax expenses (537.3) (547.5) (626.5) (720.1) (829.7) Dividends paid (37.6) (180.0) (200.8) (232.6) (267.4)

Profit after tax 1,707.0 2,090.3 2,391.9 2,749.3 3,167.6 Other f inancing cash f low 54.8 (39.1) 942.3 (83.7) (83.7)

Minority interests (11.9) (53.4) (61.1) (70.3) (81.0) Financing cash flow 114.9 73.2 1,941.5 (316.4) (351.1)

Net profit 1,695.1 2,036.9 2,330.8 2,679.0 3,086.7

Net change in cash 1,415.0 1,476.2 3,733.3 1,583.6 2,054.6

Basic EPS (RMB) 0.71 0.80 0.92 1.05 1.21

Diluted EPS (RMB) 0.64 0.76 0.87 1.00 1.15 Growth rate 2012 2013 2014E 2015E 2016E

Total DPS (RMB) 0.06 0.08 0.09 0.11 0.12 Revenue growth 11.0% 12.0% 9.6% 11.5% 12.1%

Operating profit growth 23.9% 16.8% 14.5% 14.6% 14.9%

Balance sheet (RMBm) 2012 2013 2014E 2015E 2016E Net profit growth 20.4% 20.2% 14.4% 14.9% 15.2%

Cash and cash equivalents 5,368.3 6,824.3 10,557.7 12,141.3 14,195.8 EPS 15.6% 13.3% 14.4% 14.9% 15.2%

Pledged deposit 61.8 220.4 220.4 220.4 220.4 Diluted EPS

Inventories 2,479.2 2,891.6 3,030.2 3,382.3 3,794.7 M argins 2012 2013 2014E 2015E 2016E

Trade and Bills receivables 6,924.1 7,558.9 8,285.7 9,237.3 10,354.9 Gross margin 16.1% 14.7% 14.7% 14.6% 14.5%

Other current assets 1,207.2 1,534.7 1,862.2 2,189.7 2,517.2 Operating margin 4.2% 4.4% 4.6% 4.7% 4.8%

Total current assets 16,040.6 19,029.9 23,956.2 27,170.9 31,083.1 Net margin 3.0% 3.3% 3.4% 3.5% 3.6%

Property, plant and equipment 1,308.8 1,488.1 2,520.3 3,491.2 4,401.7 S&D expenses to revenue 8.2% 7.1% 6.9% 6.8% 6.6%

Investment properties 14.7 13.5 12.4 11.4 10.5 Admin expenses to revenue 3.9% 3.6% 3.5% 3.4% 3.3%

Prepaid land lease payments 254.7 307.0 305.4 296.4 288.4

Other non-current assets 594.4 1,042.7 1,042.7 1,042.7 1,042.7 Operational 2012 2013 2014E 2015E 2016E

Total assets 18,213.3 21,881.2 27,837.1 32,012.6 36,826.4 ROA 9.3% 9.3% 8.4% 8.4% 8.4%

Trade and Bills payables 2,961.5 3,202.3 3,994.0 4,457.9 5,001.6 ROE 30.6% 26.4% 21.1% 19.6% 18.5%

ST borrow ings 39.8 159.6 159.6 159.6 159.6 Net debt to equity Net Cash Net Cash Net Cash Net Cash Net Cash

Convertible bonds 0.0 0.0 0.0 0.0 0.0 Quick ratio 1.1x 1.2x 1.3x 1.4x 1.4x

Other current liabilities 7,920.0 9,069.2 9,813.7 10,803.6 11,963.5 Current ratio 1.5x 1.5x 1.7x 1.8x 1.8x

Total current liabilities 10,921.3 12,431.1 13,967.3 15,421.2 17,124.8 Interest coverage ratio 36.1x 39.7x 37.1x 42.5x 48.9x

LT borrow ings 0.0 0.0 0.0 0.0 0.0 Receivable turnover days 45 44 44 44 44

Convertible bonds 699.6 716.8 1,742.8 1,742.8 1,742.8 Payable turnover days -25 -25 -25 -25 -25

Other non-current liabilities 752.1 675.6 692.1 710.4 732.3 Inventory days 19 20 19 19 19

Total liabilities 12,373.0 13,823.5 16,402.3 17,874.4 19,599.9 Working capital cycle 39 39 38 38 38

Share capital and reserves 5,390.5 7,571.8 10,887.8 13,520.9 16,528.2

Equity Component of CB 149.2 149.2 149.2 149.2 149.2

Shareholders' equity 5,539.7 7,721.0 11,037.0 13,670.2 16,677.5

Minority interests 300.5 336.6 397.8 468.1 549.0

Total equity & liabilities 18,213.3 21,881.2 27,837.1 32,012.6 36,826.4

Basic BPS (RMB) 2.44 3.17 4.50 5.56 6.78

16

The company reported quarterly result in April, with revenue and net profit up 13.0% and 17.7% YoY to RMB 15,999mn and RMB466mn respectively. The revenue growth of WM/WH was -2.8%/1.8%. The weak sales in manufacturing was mainly due to high base in 1Q13 (WM: +11.9%/WH: +20.5%), together with a sluggish domestic demand. ICS segment recorded a stable growth thanks to strong demand from air conditioners (by parent Haier). Overall net margin improved by 0.1% YoY.

Quarter results

Figure 37: Quarter results recap


Quarter result 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

Profit and loss (RMBmn)

Washing machine 2,922 2,607 3,487 4,261 3,269 2,363 4,140 4,450 3,176

Water heater 857 1,081 1,124 1,427 1,033 990 1,143 1,192 1,052

Integrated channel services (ICS) 11,482 12,838 13,142 13,307 13,171 13,985 15,292 15,120 15,017

Intersegment elimination (2,858) (2,625) (3,257) (4,180) (3,315) (2,517) (3,733) (4,319) (3,246)

Reported revenue 12,403 13,901 14,496 14,815 14,158 14,821 16,842 16,442 15,999

Reported Net profit 316 396 459 524 396 426 567 648 466

Growth YOY

Washing machine 11.9% -9.4% 18.7% 4.4% -2.8%

Water heater 20.5% -8.4% 1.7% -16.5% 1.8%

Integrated channel services (ICS) 14.7% 8.9% 16.4% 13.6% 14.0%

Reported revenue 14.2% 6.6% 16.2% 11.0% 13.0%

Reported Net profit 25.3% 7.4% 23.7% 23.6% 17.7%

Net margin 2.5% 2.9% 3.2% 3.5% 2.8% 2.9% 3.4% 3.9% 2.9%

% to full year revenue 22.3% 25.0% 26.1% 26.6% 22.7% 23.8% 27.0% 26.4% 23.4%

% to full year profit 18.6% 23.4% 27.1% 30.9% 19.4% 20.9% 27.8% 31.8% 20.0%

17

Haier is market leader in the washing machine (WM) and water heater (WH) segments in terms of sales volume. Comparing the WH market in value terms, A.O.Smith (AOS.US) has the largest share due to higher ASPs. A.O.Smith, a US-based global water heater and boiler manufacturer could enjoy higher GM in WH due to its higher market positioning and Haier could maintain a higher GM due to a better support from parent company, Haier Group.

We compare Haier with two other home appliance distributors, but both Gome and Suning adopt a self-owned stores business model and stores located mainly in Tier-1/2 cities, but Haier’s stores are franchised and more deeply penetrated into lower-tier markets. We also compare Goodaymart with other large-item lo-gistics players. Suning Logistics was developed by Suning to handle its eCom-merce packages, but is in the progress of opening to third party platform. Annto was founded by Midea in early 2000, providing integrated logistics management services including cold chain management. Cosco, founded in 2002, is one of the third-party large items logistics providers for home appliances.

Peer Comparisons

Figure 38: Comparison with other industry players


* Suning FY2012 segment operating margin was about 3.3%

** No separate disclosure for Midea on water heater

Washing machine (FY 2013)

Segment revenue

(RMB mn) Segment GM Group revenue Group GM

Segment/Group

revenue

Haier (1169.HK) 14,221.9 27.3% 76,147.4 14.7% 18.7%

Little Swan (000418.CH) 7,994.5 26.3% 8,728.0 25.0% 91.6%

Hefei Sanyo (600983.CH) 4,023.1 38.1% 5,325.3 34.3% 75.5%

Midea (000333.CH) 8,053.4 26.6% 120,975.0 23.3% 6.7%

Water heater (FY 2013)

Segment revenue

(RMB mn) Segment GM Group revenue Group GM

Segment/Group

revenue

Haier (1169.HK) 4,357.7 35.5% 76,147.4 14.7% 5.7%

A.O.Smith (AOS.US) 13,568.9 35.9% 13,568.9 35.9% 100.0%

Vanward (002543.CH) 1,785.2 33.8% for gas, 31.0% for elec. 3,692.5 28.3% 48.3%

Macro (000533.CH) 2,218.9 28.6% 2,310.9 27.8% 96.0%

Distribution service (FY2013) Business model

Haier (1169.HK) Franchised

Gome (493.HK) Self-owned

Suning (002024.CH) Self-owned

Segment revenue (RMB mn)

57,567.8

56,400.6

105,292.2

Segment operating margin

1.8%

0.1%

2.1%

18

Figure 39: Comparison with other logistics players


Logistics

service provider Warehouses

Total

warehouse

area (m sqm) Descriptions

Goodaymart

- 11 warehouses,

- 90 distribution centers,

- >20,000 delivery centers

2.00 - Mainly concentrated in cities at the county level and below

Suning Logistics - 19 distribution centers,

- 5,000 delivery centers1.80 - Same day delivery to 84 cities

Annto logistics - 8 regional office,

- >200 DC4.00

- Provide other service includes flight forwarding, supply chain

management and cold chain logistics

COSCO n/a 1.20 - Provide other logistic services for F&B, chemicals, machinery

Gome

- 60 regional distribution centers,

- 1,585 delivery centers,

- 15,000+ trucks

1.95 - Cover 428 cities (mainly in T1/2 cities)

- Same day delivery to 178 cities

JD.com

- 6 regional distribution centers,

- 86 warehouses,

- 1,620 delivery stations

1.50

- Cover 495 cities

- Same day delivery to 43 cities,

- Next day delivery to 248 cities

19

Company Background. Haier Electronics (1169.HK) is China’s market leader in washing machines (market share 28.1% in 2013) and water heaters (market share 18.3% in 2013), according to China Market Monitor Report. Haier ac-quired its white goods business in 2005-2006 by asset injections from its parent company, and acquired ICS from Haier Group in 2009. Haier Electronics is now positioned as the Haier Group’s integrated channel services platform.

A-share listed Qingdao Haier. Qingdao Haier (600690.CH) was listed on the Shanghai Stock Exchange in 1993. Besides the washing machine and water heater business which are currently operated under Haier Electronics, Qingdao Haier also offers other white goods such as refrigerators, air-conditioners and other small home appliances. According to China Market Monitor, Qingdao Haier is the no. 1 player in the refrigerator segment (market share 25.2% in 2013) and no. 3 in air conditioners (market share 12.64% in 2013) in China.

Appendix I: Company background and history

Figure 40: Company history


Time Event

Dec-1997 CCT Multimedia (1169.HK) was listed in HK

Dec-2001 The listed company acquired mobile phone operation jointed operated by CCT Telecom (138.HK) and the Haier Group

Jan-2002 CCT Multimedia changed name to Haier CCT

Jan-2005 Haier Group injected the top loading washing machine business segment into Haier CCT.

Mar-2005 Haier CCT changed name to Haier Electronics

May-2006 Haier Electronics sold mobile and handset business to Haier Group

Sep-2006 Haier Group injected front loading washing machine and water heater business into Haier Electronics

Sep-2009 The company announced to establish a wholly-owned subsidiary in Shanghai to expand the sales, logistics and services

network in 3rd and 4th tier markets

Mar-2010 The company completed the asset transfer of distribution channel from Haier Group

Aug-2010 The company acquired logistics business from Haier Group with the consideration of RMB763m

Jun-2011 The company obtained control of the eCommerce business from Haier Group

Jun-2011 The company acquired after sale service business from Haier Group with the consideration of RMB240m

Aug-2011 The company introduced Carlyle as a strategic investor and issued CB (equals to 100mn shares with exercise price HK$10.67)

and warrants (equal to 40mn shares with exercise price HK$11.20)

Dec-2013 The company introduced Alibaba as a strategic investor and Alibaba will invest HK$2.82bn in the form of CEB and shares

Jan-2014 Carlyle placed 100mn shares by way of block trade (100mn absorbed in secondary market on top of the CB and warrants

subscription in Aug 2011

20

Appendix II: Company shareholding structure

Figure 41: Company shareholding structure assuming full conversion of CBs by Alibaba and Carlyle


21

Executive directors

Mr. Zhou Yun Jie, Chairman and CEO, aged 47, has been serving as an Exec-utive Director of the company since 12 November 2009. He joined the Haier Group in 1988 and has over 20 years of experience in the areas of sales man-agement, enterprise management and international business. Mr. Zhou graduat-ed from the Huazhong University of Science and Technology with a Bachelor’s degree in Engineering in 1998. He has a Master’s degree in corporate manage-ment from the Ocean University of China and has completed his Doctoral cours-es with a diploma in Management from the Xian Jiaotong University.

Non-executive directors

Mr. Zhang Yong, aged 42, has served as a non-executive Director since March 2014. Mr. Zhang is chief operating officer of Alibaba Group and is responsible for overseeing e-commerce business operations including the Alibaba B2B busi-ness group; B2C business group including Tmall.com, Juhuasuan and local ser-vices; Taobao business group; mobile business unit; international B2C business unit; O2O retail; online travel; and advertising. Mr. Zhang holds a bachelor’s de-gree in finance from Shanghai University of Finance and Economics, and is a member of the Chinese Institute of Certified Public Accountants. Mr. Liang Hai Shan, aged 47, has served as an Executive Director of the com-pany since December 2001 and has been re-designated as Non-executive Di-rectors since November 2009. Mr. Liang was previously mainly responsible for strategic procurement and overall quality control of products of the Group. He is currently responsible for identifying market opportunities and white goods busi-ness strategies formulation of the company. He received a Bachelor’s degree of Industry from the Xian Jiaotong University and has 25 years of experience in the manufacture of household electrical appliances, particularly in raw material pro-curement function and white goods business.

Ms. Tan Lixia, aged 43, has served has served as a non-executive Director of the Company since 18 November 2013. Currently, she is the Senior Vice Presi-dent and the Chief Financial Officer of Haier Group. She joined Haier Group in 1992 and had held the positions as the Head of Department of Overseas Market Development of Haier Group and Head of Department of Financial Management of Haier Group. Ms. Tan graduated from Central University of Finance and Eco-nomics and has a master degree in Business Administration from the China Eu-rope International Business School upon completion of the EMBA program. She is a Fellow of the Chartered Institute of Management Accountants and has been designated as a Chartered Global Management Accountant (CGMA). Ms. Janine Junyuan FENG, aged 45, has been appointed as a non-executive Director of the Company since 24 August 2011. She is also a member of the remuneration committee, nomination committee and strategic committee of the company. Ms. Feng joined the Carlyle Group in 1998, and is currently a Manag-ing Director of Carlyle. Ms. Feng has been involved in many direct investments by the Carlyle Group in consumer, financial and industrial companies in the PRC. Prior to joining the Carlyle Group, Ms. Feng worked for Credit Suisse First Boston’s New York office, engaging in investment banking business. Ms. Feng received an MBA degree from Harvard Business School in 1996.

Appendix III: Selected management profile

22

Dr. Wang Han Hua, aged 49, has served as an non-executive Director of the Company since 1 June 2013. He is the China Managing Director of Sonos Inc, a US-based, world leading wireless HiFi producer since April 2014. Prior to this, in December 2012 he was appointed chief executive officer of Allyes Information Technology (Shanghai) Co., Ltd., an internet company providing digital market-ing solutions to its customers. Prior to this, Dr. Wang had been president of Am-azon (China) Holding Company Limited from May 2005 until November 2012 and was responsible for the sale, marketing, cooperation and construction of Amazon’s B2C E-commerce ecological chain in China. Prior to joining Amazon, Dr. Wang held a number of positions with Motorola Mobility Technologies (China) Company Limited Beijing branch company between 1998 and 2005 in-cluding as marketing director, director of strategy and corporate planning, vice president of the Asia Pacific region and general manager of the mobile tele-phone operations of China. Dr. Wang obtained his Doctor of Philosophy degree from the University of Nebraska of the United States in 1994. Alternate Director

Mr. GUI Zhaoyu, aged 42, has been appointed as alternate director to Ms. Ja-nine Junyuan Feng since 24 August 2011. Mr. Gui is a director of the Carlyle Group and is focused on Asia buyout opportunities with a particular focus on opportunities in the PRC. Mr. Gui is primarily based in Beijing. Prior to joining the Carlyle Group, Mr. Gui was a Vice President of the Investment Banking De-partment at China International Capital Corporation in Beijing, and a Vice Presi-dent of J.P. Morgan Securities (Asia Pacific) Limited in Hong Kong. He also has working experience at the Special Investment Department of CIC and two state owned companies, and had founded his own logistics company. Mr. Gui re-ceived his MBA degree from Massachusetts Institute of Technology Sloan School of Management.

Appendix III: Selected management profile (cont’)

23

Key upside risks:

Key upside risks: 1) Strong net cash position may indicate M&A opportunities; 2) stronger than expected economic recovery, leading to improvement of property and home appliance sales; 3) more 3rd party brands choose to use Haier’s distri-bution channel

Appendix IV: Investment risks

Appendix V: China’s home appliance subsidy

programs

Figure 42: List of home appliance subsidy programs


Program Duration

Phase 1: December 2007

Pilot scheme in 4 provinces/cities

Phase 2: December 2008

Expansion to 14 provinces/cities

Phase 3: February 2009

Full expansion

Expired 4 years after start date, last

batch expired in January 2013

Details

Old for new

(以旧换新)

Energy saving subsidy

program

(节能家电补贴)

June 2009 - December 2011

June 2012 - June 2013

Customers receive 10% subsidy (with caps) from the

replacement of old home appliance in urban areas. The

program covers TV, refrigerator, washing machine, AC and

personal computer.

Customers receive subsidy (RMB100-600) from the

purchase of five types of energy saving home appliance

(AC, TV, refrigerator, washing machine and water heater)

Home appliance

go rural (家电下乡)

Customers receive 13% subsidy from purchase of home

appliance, including color TV, refrigerator, mobile phone, air

conditioner, etc.

24

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China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459

Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888.

BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :

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