Haier Electronics

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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21 January 2014

Asia Pacific/China

Equity Research

Consumer Electronics

Haier Electronics

(1169.HK / 1169 HK) INITIATION

ICS: The future growth engine

■ Collaboration with Alibaba may result in 5-10% earnings upside. We

initiate coverage on Haier Electronics with an OUTPERFORM and a HK$30

target price. Haier Electronics has a large exposure to Integrated Channel

Services (ICS) including logistics which we believe will be strengthened with

the strategic alliance with Alibaba. We estimate that third-party large-item

logistics from Tmall will result in 4.7% earnings upside in 2015 in our base

case (factored into our estimate), or up to 9.6% under the bull case scenario.

There may be even more upside if the Tmall alliance is applied to other

large-item sales networks in China (e.g., furniture and sanitary wares).

■ An outstanding integrated channel services provider. We expect Haier

Electronics' ICS business to witness top-line growth and margin expansion

with increasing value-added services and contribution from third-party brands

distribution. We expect the latter to achieve a 39% three-year CAGR in 2013-

15 and account for 18% of total revenue by 2015 (vs. 13% now).

■ A leading white goods player. We believe the company will benefit from

increasing penetration of white goods products in Tier 3/4 cities and rural

markets. We expect it to benefit from its focus on innovative new products,

especially those that facilitate energy saving and environmental protection.

■ Target price HK$30.0, implying 31% potential upside. We expect Haier

Electronics to achieve a 23.2% three-year EPS CAGR over 2013-15. Our

target price of HK$30.0 is based on a SOTP-implied 18.9x target 2015E P/E

with reference to comparable companies in each business segment. It

implies 15.8x 2015E ex-cash P/E. Key investment risks include economic

factors, changes in government policy, and cost and working capital controls.

Share price performance

0

100

200

300

400

0

10

20

30

40

Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the

HANG SENG INDEX which closed at 22928.95 on 17/01/14

On 17/01/14 the spot exchange rate was HK$7.76/US$1

Performance Over 1M 3M 12M Absolute (%) 12.6 42.3 93.3 Relative (%) 14.8 45.8 101.2

Financial and valuation metrics

Year 12/12A 12/13E 12/14E 12/15E Revenue (Rmb mn) 55,615.0 63,117.1 73,074.0 86,821.9 EBITDA (Rmb mn) 2,490.4 2,838.0 3,594.1 4,532.5 EBIT (Rmb mn) 2,379.0 2,717.3 3,461.9 4,375.6 Net profit (Rmb mn) 1,695.1 1,997.0 2,529.7 3,230.2 EPS (CS adj.) (Rmb) 0.66 0.78 0.99 1.24 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.80 0.97 1.19 EPS growth (%) 19.1 18.0 27.0 24.8 P/E (x) 26.9 22.8 18.0 14.4 Dividend yield (%) 0.36 0.43 0.55 0.70 EV/EBITDA (x) 16.6 13.8 10.4 7.8 P/B (x) 8.1 5.7 4.4 3.4 ROE (%) 36.6 29.6 27.1 26.6 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM* Price (20 Jan 14, HK$) 22.85 Target price (HK$) 30.00¹ Upside/downside (%) 31.3 Mkt cap (HK$ mn) 58,893 (US$ 7,594) Enterprise value (Rmb mn) 39,189 Number of shares (mn) 2,577.38 Free float (%) 34.5 52-week price range 24.4 - 10.9 ADTO - 6M (US$ mn) 14.7

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Eva Wang

852 2101 7365

[email protected]

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 2

Focus charts and tables Figure 1: Gross revenue breakdown (1H13) Figure 2: ICS +Tmall—Key growth driver

Washing machines

16.2%

Water heaters5.8%

Integrated channel services78.0%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2009 2010 2011 2012 2013E 2014E 2015E

Revenue (Rmb mn)

31% CAGRin 2010-12

17% CAGRin 2013-15E

Source: Company data Source: Company data, Credit Suisse estimates

Figure 3: White goods penetration lower than black goods Figure 4: Revenue and margin forecasts

98.091.0

126.8

98.5

136.1

67.2

25.4

67.3

116.9

0

20

40

60

80

100

120

140

160

Washingmachines

Water heaters Air conditioners Refrigerators TV

Urban Rural

0

2

4

6

8

10

12

14

16

18

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2010 2011 2012 2013E 2014E 2015E

%

Rm

b m

n

Washing machines Water heaters ICS + Tmall

Gross margin (%) Operating margin (%) Net margin (%)

Source: CEIC, NBS Source: Company data, Credit Suisse estimates

Figure 5: Scenario analysis on potential upside from more Tmall third-party logistics

Upside vs. 2015E estimate Key assumption

Scenario Revenue Net profit Annual large items sales

growth rate in 2014-15E

Allocation to Goodaymart

logistics

Bear 1.7% 2.5% 50% 50%

Base 3.2% 4.7% 75% 70%

Bull 6.6% 9.6% 125% 90%

Note: Please refer to Figure 19 for full base case assumption. Source: Credit Suisse estimates

Figure 6: SOTP valuation method (2015E valuation base)

Segment profit

share

Target 2015E

P/E (x)

Valuation basis

Washing machines 30.1% 11.5 Washing machine comps

Water heaters 14.6% 14.5 Water heater comps

ICS + Tmall 55.3% 24.0 Logistics companies FedEx and UPS in 2000-2004

SOTP valuation 100.0% 18.9 Sum of the parts

Source: Credit Suisse estimates

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 3

ICS: The future growth engine Haier Electronics is a leading white goods player in China with a No. 1 market share in washing

machines and water heaters. More importantly, we believe its integrated channel services (ICS)

network, which has strong competitive advantages in distribution, logistics, services and e-

commerce, should be a significant growth driver in the next few years. The strategic alliance with

Alibaba should further strengthen the development of independent third-party logistics.

An outstanding ICS provider

We believe Haier Electronics will benefit from both top-line growth and margin upside in its

ICS business which will further strengthen its leading distribution platform in Tier 3/4

markets in China, extensive logistics network, strong aftersales service capabilities and e-

commerce development. We believe third-party brands will be the key revenue growth

driver in the next few years, with a 39% three-year CAGR over 2013-15E, and account for

18% of total revenue by 2015E (vs. 13% now). The collaboration with Alibaba on logistics

should bring more business opportunities for Goodaymart logistics. We estimate that the

third-party large-item logistics from Tmall will result in 4.7% earnings upside in 2015 in our

base case (factored into our estimate), or up to 9.6% in the bull case. There may be even

greater upside if the Tmall alliance is applied to other large item-sales networks in China

(e.g., furniture and sanitary wares).

A leading white goods player

Haier Electronics is a leading manufacturer of washing machines (27.7% market share) and

water heaters (18.7% market share) in China. It has consistently ranked No. 1 in terms of sales

volume over the past few years. We believe the company will continue to benefit from

increasing penetration of white goods in China, especially in Tier 3/4 cities and rural markets,

given rural penetration of white goods is far less than that of black goods. We believe it will

continue to benefit from its focus on innovative new products, especially those that facilitate

energy savings and environmental protection, and maintain its leadership position.

Earnings forecasts and valuation

We expect Haier Electronics to achieve a 16.0% three-year revenue CAGR and a 23.2%

three-year EPS CAGR over 2013-15 mainly driven by growth in its ICS business,

especially from third-party brands. We believe the increasing earnings contribution from

the ICS business will continue to create opportunities for a re-rating. By 2016, we forecast

the profit contribution will increase to 55% (from 32% in 2013E).

Haier Electronics is trading at 18.0x 2014E or 14.4x 2015E P/E. We use a sum-of-the-

parts valuation—11.5x target P/E for the washing machine business, 14.5x for the water

heater business, and 24.0x for the ICS business, with reference to comps companies in

each sector, and weighted by segment profit contribution. Our target price of HK$30.0 is

based on the SOTP-implied 18.9x target 2015E P/E, implying 31% potential upside. Our

target price implies 0.8x target PEG. If we exclude expected net cash on hand, our target

price implies only 15.8x 2015E ex-cash P/E. We initiate coverage on Haier Electronics

with an OUTPERFORM rating. We believe the potential upside may come from faster

growth and higher earnings contribution from the ICS business, especially with greater

business opportunities from the alliance with Alibaba.

Investment risks

Key investment risks for Haier Electronics include weakness in economic growth and an

end-market demand slowdown, regulatory and stimulative policy changes, difficulty in

increasing third-party brand sales, possible raw material and/or labour cost hikes, a failure

in working capital control, and corporate governance factors such as connected party

transactions.

No.1 white goods brand in

China with strong integrated

channel services

Revenue from third-party

brands and the strategic

alliance with Alibaba should

be key growth drivers

No.1 market share in

washing machine and water

heater markets in China

We forecast a 16.0%

revenue CAGR and a 23.2%

EPS CAGR in 2013-15

Our SOTP-based target

price of HK$30.0 is based

on blended 18.9x target

2015 P/E

Risk factors: economy, end-

demand, policy, cost and

working capital, etc.

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 4

Haier Electronics Group Co. 1169.HK / 1169 HK Price (20 Jan 14): HK$22.85, Rating:: OUTPERFORM, Target Price: HK$30.00, Analyst: Eva Wang

Target price scenario

Scenario TP %Up/Dwn Assumptions

Upside 35.20 54.00 30.0x ICS segment target PE and 22.2x total target PE

Central Case 30.00 31.29 24.0x ICS segment target PE and 18.9x total target PE

Downside 22.00 (3.75) 15.0x ICS segment target PE and 13.9x total target PE

Key earnings drivers 12/12A 12/13E 12/14E 12/15E

Sales from washing machines

5,198 5,550 6,105 6,715 Sales from water heaters 849 849 916 1,008 Sales from integrated channel

49,569 56,719 65,226 76,315 Gross profit margin (%) 16.1 15.5 15.7 15.7 — — — —

Income statement (Rmb mn) 12/12A 12/13E 12/14E 12/15E

Sales revenue 55,615 63,117 73,074 86,822 Cost of goods sold 46,674 53,309 61,635 73,215 SG&A 6,616 7,203 8,156 9,511 Other operating exp./(inc.) (165.2) (232.2) (311.4) (436.5) EBITDA 2,490 2,838 3,594 4,532 Depreciation & amortisation 111.4 120.7 132.1 156.9 EBIT 2,379 2,717 3,462 4,376 Net interest expense/(inc.) 28.6 71.2 110.2 95.6 Non-operating inc./(exp.) — — — — Associates/JV — — — — Recurring PBT 2,350 2,646 3,352 4,280

Exceptionals/extraordinaries (106.1) — — — Taxes 537 635 804 1,027 Profit after tax 1,707 2,011 2,547 3,253 Other after tax income — — — — Minority interests 11.9 14.0 17.7 22.6 Preferred dividends — — — — Reported net profit 1,695 1,997 2,530 3,230 Analyst adjustments — — — — Net profit (Credit Suisse) 1,695 1,997 2,530 3,230

Cash flow (Rmb mn) 12/12A 12/13E 12/14E 12/15E

EBIT 2,379 2,717 3,462 4,376 Net interest — — — — Tax paid (392) (764) (930) (1,082) Working capital (465.2) (662.9) (230.4) (791.5) Other cash & non-cash items 218.5 235.0 272.3 318.2 Operating cash flow 1,740 1,525 2,574 2,820 Capex (476.6) (513.5) (507.4) (557.4) Free cash flow to the firm 1,264 1,012 2,067 2,263 Disposals of fixed assets — — — — Acquisitions — — — — Divestments 4.5 540.6 5.0 5.0 Associate investments — — — — Other investment/(outflows) (177.0) — — — Investing cash flow (649.1) 27.1 (502.4) (552.4) Equity raised 82.9 12.3 1.6 1.6 Dividends paid — (157.5) (220.0) (273.6) Net borrowings 14.8 — — — Other financing cash flow 17 2,049 (27) (27) Financing cash flow 115 1,904 (245) (299) Total cash flow 1,206 3,456 1,827 1,969 Adjustments 225.5 234.0 234.0 234.0 Net change in cash 1,432 3,690 2,061 2,203

Balance sheet (Rmb mn) 12/12A 12/13E 12/14E 12/15E

Cash & cash equivalents 5,368 8,824 10,651 12,620 Current receivables 6,924 7,256 8,761 10,269 Inventories 2,479 3,363 3,392 4,632 Other current assets 1,269 1,724 1,968 2,300 Current assets 16,041 21,167 24,772 29,821 Property, plant & equip. 1,324 1,175 1,551 1,904 Investments 2.9 2.9 2.9 2.9 Intangibles 74.7 80.6 79.8 78.5 Other non-current assets 771.5 811.9 856.8 956.4 Total assets 18,213 23,237 27,262 32,762 Accounts payable 9,456 10,464 12,011 14,300 Short-term debt 39.8 39.8 39.8 39.8 Current provisions 534.3 574.1 617.7 665.7 Other current liabilities 891.0 807.3 731.9 731.9 Current liabilities 10,921 11,885 13,401 15,738 Long-term debt 700 2,016 2,016 2,016 Non-current provisions 266.9 286.8 308.5 332.5 Other non-current liab. 485.2 485.2 485.2 485.2 Total liabilities 12,373 14,672 16,210 18,571 Shareholders' equity 5,390 8,101 10,571 13,687 Minority interests 300.5 314.5 332.2 354.8 Total liabilities & equity 18,213 23,237 27,262 32,762

Per share data 12/12A 12/13E 12/14E 12/15E

Shares (wtd avg.) (mn) 2,655 2,714 2,733 2,756 EPS (Credit Suisse) (Rmb)

0.66 0.78 0.99 1.24 DPS (Rmb) 0.07 0.08 0.10 0.13 BVPS (Rmb) 2.20 3.15 4.07 5.23 Operating CFPS (Rmb) 0.66 0.56 0.94 1.02

Key ratios and valuation

12/12A 12/13E 12/14E 12/15E

Growth(%) Sales revenue 11.0 13.5 15.8 18.8 EBIT 28.2 14.2 27.4 26.4 Net profit 20.4 17.8 26.7 27.7 EPS 19.1 18.0 27.0 24.8 Margins (%) EBITDA 4.48 4.50 4.92 5.22 EBIT 4.28 4.31 4.74 5.04 Pre-tax profit 4.23 4.19 4.59 4.93 Net profit 3.05 3.16 3.46 3.72 Valuation metrics (x) P/E 26.9 22.8 18.0 14.4 P/B 8.10 5.66 4.38 3.41 Dividend yield (%) 0.36 0.43 0.55 0.70 P/CF 27.2 31.7 18.9 17.4 EV/sales 0.74 0.62 0.51 0.41 EV/EBITDA 16.6 13.8 10.4 7.8 EV/EBIT 17.4 14.4 10.8 8.1 ROE analysis (%) ROE 36.6 29.6 27.1 26.6 ROIC 163 137 124 109 Asset turnover (x) 3.05 2.72 2.68 2.65 Interest burden (x) 0.99 0.97 0.97 0.98 Tax burden (x) 0.76 0.76 0.76 0.76 Financial leverage (x) 3.12 2.71 2.47 2.31 Credit ratios Net debt/equity (%) (79.3) (79.0) (77.8) (74.4) Net debt/EBITDA (x) (1.86) (2.39) (2.39) (2.33) Interest cover (x) 83.0 38.1 31.4 45.8

Source: Company data, Thomson Reuters, Credit Suisse estimates.

0

5

10

15

20

25

30

2009 2010 2011 2012 2013 2014

12MF P/E multiple

0

1

2

3

4

5

6

2009 2010 2011 2012 2013 2014

12MF P/B multiple

Source: IBES

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 5

Valuation comps Figure 7: Valuation comps

Market Price EPS growth P/E P/B Yield

cap (Loc (%) (x) (x) (%) Price Performance

Name Ticker US$ mn curr) CY14E CY15E CY14E CY15E CY14E CY15E CY14E 1M 3M 1Y

Haier Elec 1169.HK 7,594 22.85 27.0 24.8 18.0 14.4 4.4 3.4 0.6 12.6 42.3 93.3

Comprehensive

Qingdao Haier 600690.SS 8,879 19.75 14.9 19.3 11.6 9.8 3.1 2.5 2.5 8.6 19.3 39.5

Hisense Kelon – H 0921.HK 627 10.58 21.6 30.2 7.6 5.9 3.0 1.9 2.8 -4.9 55.1 185.9

Hisense Kelon – A 000921.SZ 1,527 10.33 21.6 30.2 9.4 7.3 3.7 2.3 2.2 -8.9 5.8 39.4

TCL Corp. 000100.SZ 3,202 2.28 23.4 27.0 8.3 6.6 1.3 1.1 3.9 0.0 -7.7 -8.1

Changhong 600839.SS 2,662 3.49 10.0 n.a. 31.7 n.a. 1.1 n.a. 0.9 17.1 29.3 63.8

Meiling 000521.SZ 448 4.51 21.9 19.4 10.8 9.1 1.0 0.9 2.8 -9.4 11.4 5.6

Aucma 600336.SS 549 4.87 n.a. n.a. n.a. n.a. n.a. n.a. n.a. -5.4 -18.8 84.5

Midea Group 000333.SZ 13,238 47.51 20.1 18.4 9.1 7.7 2.3 1.8 3.8 -8.2 0.2 n.a.

Whirlpool WHR.N 12,311 156.84 21.5 15.8 12.8 11.0 2.2 1.8 1.8 1.0 7.3 53.3

Average 19.4 22.9 12.7 8.2 2.2 1.8 2.6 -1.1 11.3 58.0

Washing machines

Little Swan 000418.SZ 632 8.67 21.1 14.5 10.3 9.0 1.2 1.1 2.2 -7.5 -1.0 -10.3

Hefei Sanyo 600983.SS 1,181 13.41 23.7 19.2 14.5 12.1 2.8 2.5 1.4 -14.7 13.9 71.5

Average 22.4 16.8 12.4 10.5 2.0 1.8 1.8 -11.1 6.5 30.6

Water heaters

Macro 000533.SZ 452 3.96 n.a. n.a. n.a. n.a. n.a. n.a. n.a. -5.3 -3.6 -4.1

Vatti 002035.SZ 500 10.11 26.6 15.4 9.7 8.4 2.0 1.7 2.9 -15.0 -15.8 3.1

Vanward 002543.SZ 760 11.50 -1.6 25.8 14.1 11.2 1.1 1.5 4.0 -8.6 -6.4 143.8

Taiwan Sakura 9911.TW 186 20.30 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1.2 6.8 18.4

Rinnai 5947.T 4,132 8,270 4.9 6.3 19.6 18.4 2.0 1.8 0.8 6.7 11.5 31.5

Noritz 5943.T 1,113 2,280 11.5 8.7 15.8 14.6 1.1 1.0 1.3 2.7 3.7 46.2

A O Smith AOS.N 4,757 52.15 11.1 12.7 22.9 20.3 3.2 2.8 1.0 -3.4 1.5 54.4

Average 10.5 13.8 16.4 14.6 1.9 1.8 2.0 -3.1 -0.3 41.9

Air-conditioner

Chigo 0449.HK 201 0.19 120.0 12.1 5.6 5.0 0.4 0.4 4.9 -1.6 5.7 -28.8

GREE 000651.SZ 14,696 29.57 18.0 17.4 7.5 6.4 2.1 1.7 3.5 -3.0 8.5 4.5

Chunlan 600854.SS 346 4.03 n.a. n.a. n.a. n.a. n.a. n.a. n.a. -9.0 -11.4 0.8

Average 69.0 14.8 6.6 5.7 1.3 1.0 4.2 -4.6 0.9 -7.9

TVs

Skyworth Digital 0751.HK 1,476 4.08 16.2 8.9 5.7 5.2 0.9 0.8 5.5 -3.1 8.8 -10.1

TCL Multimedia 1070.HK 543 3.16 42.5 25.7 6.5 5.2 0.8 0.7 4.7 -11.0 -7.6 -37.2

Hisense 600060.SS 2,348 10.86 13.1 11.6 6.8 6.1 1.3 1.2 3.8 -5.6 -9.8 -2.7

Konka 000016.SZ 487 3.69 n.a. n.a. n.a. n.a. n.a. n.a. n.a. -2.9 -1.6 8.5

Average 23.9 15.4 6.3 5.5 1.0 0.9 4.6 -5.6 -2.6 -10.4

Distributors

GOME 0493.HK 2,742 1.26 43.1 27.4 15.5 12.2 1.0 1.0 1.7 -6.7 8.6 27.3

Suning 002024.SZ 11,662 9.56 15.7 64.7 71.9 43.7 2.4 2.3 0.3 -1.6 -23.0 27.5

Average 29.4 46.0 43.7 27.9 1.7 1.6 1.0 -4.2 -7.2 27.4

Logistics

FedEx FDX.N 43,871 140.51 21.6 23.5 17.3 14.0 2.3 2.0 0.5 -1.5 8.3 40.8

UPS UPS.N 92,751 99.91 15.7 13.6 18.4 16.2 28.8 25.7 2.7 -3.3 6.5 24.5

DHL DPWGn.DE 43,506 26.60 9.0 13.6 16.1 14.2 2.8 2.5 3.1 0.9 7.2 54.1

Average 15.4 16.9 17.3 14.8 11.3 10.1 2.1 -1.3 7.4 39.8

Source: Company data, Credit Suisse estimates for Haier Electronics, IBES for all other companies' estimates. Prices as of 20 Jan 2014

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 6

An outstanding ICS provider Haier Electronics is a leading white goods player in China with a No.1 market share in

washing machines and water heaters. More importantly, its Integrated Channel Services

(ICS) network, which includes the leading distribution platform in Tier 3/4 markets in China,

an extensive logistics network, strong after-sales service capabilities and the e-commerce

platforms, should be a significant growth driver in the coming years, in our view, especially

with strong growth potential from third-party revenue and the strategic alliance with

Alibaba.

Figure 8: Net revenue breakdown (1H13) Figure 9: Gross revenue breakdown (1H13)

Washing machines

6.6% Water heaters1.5%


Washing machines

16.2%

Water heaters5.8%


Source: Company data Source: Company data

Company background

Haier Electronics has No.1 market shares in the washing machine (27.7% in 1H13

according to China Market Monitor Report) and water heater markets (18.7% in 1H13

according to China Market Monitor Report) in China. Its parent, Haier Group, was founded

in 1984 and is currently the No.1 white goods brand globally, according to Euromonitor.

The parent Haier Group, as shown in Figure 10, is composed of Haier Investment and

Development Ltd. and Haier Group Corp., with two listed companies, Haier Electronics

and Qingdao Haier, under them. While Haier Electronics is in charge of white goods

products such as washing machines and water heaters, Qingdao Haier controls

refrigerators (No. 1 market share in China, 23.8% in 1H13, according to China Market

Monitor Report), and air conditioning products (No. 3 market share in China, 12.9% in

1H13, according to China Market Monitor Report, following Gree and Midea). Meanwhile,

the black goods business (TVs) is under Haier Group Corp.

Figure 10: Haier Group and Haier Electronics Figure 11: Group product/business chart

Haier Investment and Development Ltd.

Haier Group

Qingdao Haier (600690.SH)

13.2%

46.7%Haier Elec (1169.HK)

43.4%

Haier Group Corp.

Haier Group

White goods

Digital and personal products

Integrated kitchen

Residential property

development

Other home appliance products

Haier Elec(1169.HK)

Washing machinesWater heaters


Air conditionersRefrigerators

Source: Company data Source: Company data

No.1 white goods brand with

strong integrated channel

services

Parentco Haier Group is

No.1 white goods brand

globally, according to

Euromonitor

Haier Electronics focuses on

washing machines and

water heaters; Qingdao

Haier focuses on air

conditioners and

refrigerators

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 7

Haier Electronics (1169.HK) started its white goods manufacturing business in 2005-06

with an asset injection from the parent company. In 2009-10, the company started to

develop the ICS segment, which is a strategic focus of Haier Group to develop a

consolidated platform from sales distribution to services. ICS has become the fastest

growing segment for Haier Electronics in the past few years.

Figure 12: Company history

Time Event

Dec-1997 Initial public offering of CCT Multimedia (1169.HK) in HK

Dec-2001 The listco acquired the mobile phone operation jointly operated by CCT Telecom and Haier Group, and changed the company

name to "Haier-CCT Holdings Ltd."

Jan-2005 The company completed the acquisition of top loading washing machine business from Haier Group with second public equity

offering. It changed its name from "Haier-CCT Holdings Ltd." to "Haier Electronics Group Co., Ltd."

May-2006 The company sold mobile and handset business to Haier Group

Sep-2006 Haier Group injected its front loading washing machines and water heaters into the company

Dec-2007 Haier Group started to participate in the pilot program of "home appliances to the countryside"

Jun-2008 Qingdao announced the acquisition of a 20.1% stake in the company from Deutsche Bank

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

networks for Tier 3/4 cities

Mar-2010 Haier Group injected Goodaymart into the company and started to develop the ICS business

Aug-2010 Haier Group injected its logistics business into the company

Jun-2011 Haier Group injected its after-sales services business and online sales platform (eHaier.com) into the company

Aug-2011 Carlyle Group became a strategic investor. The company issued CBs convertible to 100mn shares and 40mn warrants to Carlyle

Group

Nov-2011 The company was included in the MSCI China Index

1H 2012 Set up the external online sales platform Haier.tmall.com

Dec-2013 Alibaba Group became a strategic investor in the logistics business of the company under the brand "Goodaymart" with HK$1,857

mn investment

Source: Company data

ICS: Should be the key growth driver in the future

We believe Haier Electronics will benefit from both top-line growth and margin upside in its

ICS business, which will further strengthen its advantages in distribution, logistics, services

and e-commerce. The third-party brands will be the key revenue growth driver in the next

few years, while the strategic investment by Alibaba will strengthen its logistics business,

in our view.

Figure 13: ICS—strong revenue growth Figure 14: Gross margin on the upward trend (ICS only)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2009 2010 2011 2012 2013E 2014E 2015E

Revenue (Rmb mn)

31% CAGRin 2010-12

15% CAGRin 2013-15E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2009 2010 2011 2012 2013E 2014E 2015E

Gross profit margin

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Haier Electronics started

integrated channel services

in 2009-10

ICS: Driven by third-party

revenue and the Alibaba tie-

up

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 8

Large item logistics: Strategic collaboration with Alibaba

In December 2013, Haier announced the strategic investment by Alibaba Group in its

wholly owned logistics business under Qingdao Haier Logistics Co. Ltd. (QHL). The

investment includes: (1) HK$1.86 bn capital injection into the acquisition target for the

9.9% stake to be held by Alibaba HK (equivalent of HK$0.54 bn) and the 24.1% stake to

be held by Haier Electronics SPV II which is subject to PRC approvals (equivalent of

HK$1.32 bn); (2) HK$965 mn for subscription of 2% enlarged share capital of Haier

Electronics (i.e., 52.4 mn shares) at HK$18.413/share, or a 1% discount to the previous

closing price.

The acquisition price implied a valuation of HK$5.46 bn or 5.1x historical P/B given QHL's

net asset value at the 2013 interim, which does not look expensive against Haier's

comparable historical P/B of 6.1x at the time.

Alibaba will hold 9.9% of QHL after the subscription and has an option to increase its stake

to 24.1% after one year (but before the three-year maturity) with the issue of Convertible &

Exchangeable Bonds (CEB) by Haier Electronics to Alibaba SPV at the principal amount

of HK$1.32 bn. This CEB can be either exchanged for the 24.1% stake in QHL held by

Haier Electronics SPV II, or for 71.1 mn shares of Haier Electronics at an initial conversion

price of HK$19.334/share, with it being Alibaba decision. If the CEB is exchanged for

Haier Electronics' ordinary shares, then Alibaba will become a 4.6% stakeholder of the

enlarged share capital or 4.4% if assuming all CBs and warrants issued to Carlyle are also

exercised.

Figure 15: Qingdao Haier Logistics' shareholding structure

Haier Electronics PRC

Haier Elec

Alibaba HK

100%

9.9%

Qingdao Haier Logistics(under “Goodaymart” brand)

100%

Haier Electronics SPV I

Alibaba SPV

Convertible & Exchangeable

Bond

66%

Haier Electronics SPV II

24.1%


Figure 16: Shareholding structure change with the introduction of Alibaba

Before completion Upon completion of share subscription Exercise of conversion rights

No. of shares % stake No. of shares % stake No. of shares % stake

Haier Group 1,570.80 61.2 1,570.80 60.0 1,570.80 58.4

Alibaba SPV 0.00 0.0 52.39 2.0 123.52 4.6

Other Public 996.31 38.8 996.31 38.0 996.31 37.0

Total 2,567.11 100.0 2,619.50 100.0 2,690.63 100.0

Note: The above outstanding shares excluded the conversion of CBs and warrants.


Recall that QHL has been operating under Goodaymart brand for over a decade. It was

100% acquired by Haier Electronics' wholly owned subsidiary Qingdao New Goodaymart

in July 2011 from Haier Corp for Rmb763 mn. It now aims to become an end-to-end

integrated logistics solutions provider for large items in China. We expect it to be

reorganised with a focus on: (1) warehousing and inventory management; (2) customised

Alibaba to become a

strategic shareholder in the

logistics segment

Acquisition price implies a

5.1x historical P/B

Alibaba has an option to

either take 2% of Haier

Electronics and 34% of QHL

or 4.6% of Haier Electronics

and 9.9% of QHL with the

issue of CEB

QHL will become an end-to-

end integrated logics

solution provider for large

items in China

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 9

end-to-end logistics service for home appliances, furniture and sanitary ware; (3) last mile

services including delivery and installation; (4) value added services, such as repair and

maintenance; and (5) sales of extended warranties.

The introduction of Alibaba should bring more business opportunities, including more

orders from Tmall.com. Management has said it expects 20%+ annual logistics revenue

growth, with third-party brands likely to grow from ~20% of its logistics revenue to 40-50%

in the next few years. We believe this revenue growth target is reasonable given that the

logistics business revenue and net profit grew faster in 1H13. It accounted for 9.1% of

Haier Electronics' total net profit in 1H13, with a net margin of 4.5%, much higher than the

company's total net margin of 2.8%.

Figure 17: The revenue and net profit of QHL increased rapidly in 1H13

5.2% 5.2%5.7%

8.1%

7.5%

9.1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2011 2012 1H13

% of total revenue % of total net profit Logistics net margin Company net margin

Source: Company data, Credit Suisse estimates

Scenario and sensitivity analysis on the impact from Tmall third-party logistics

We have conducted a scenario analysis for the potential revenue and earnings

contribution from a higher allocation of Tmall large item logistics. In our base case, we

expect a 3.2% total revenue contribution and 4.7% earnings contribution in 2015 from

additional third-party logistics business done for Tmall which we have factored in our

financial forecasts. We assume a 75% annual large items sales growth rate in 2014-15E

and 70% allocation of total Tmall large item sales to Goodaymart logistics under QHL by

2015E. Our bull case scenario has even greater upside with 6.6% revenue and 9.6%

earnings contributions in 2015 estimates, assuming 125% annual large items sales growth

in 2014-15E and 90% allocation to Goodaymart logistics by 2015E.

Figure 18: Scenario analysis on potential upside from more Tmall third-party logistics

Upside vs. 2015E estimate Key assumption

Scenario Revenue Net profit Annual large items sales

growth rate in 2014-15E

Allocation to Goodaymart

logistics

Bear 1.7% 2.5% 50% 50%

Base 3.2% 4.7% 75% 70%

Bull 6.6% 9.6% 125% 90%

Note: Please refer to Figure 19 for base case full assumption. Source: Credit Suisse estimates

The key assumptions of our base case analysis are shown below. We're confident that the

allocation of total Tmall large item sales to Goodaymart logistics may reach 70% in 2015E,

because according to local media reports, on 11 November 2013, around 0.5 mn large

items' logistics on Tmall were done by Goodaymart logistics, which accounted for 49% of

our total estimated large-item sales volume on Tmall.

Logistics revenue is

expected to grow 20%+

annually

Upside from Tmall third-

party logistics business:

Base case – 3.2% on

revenue and 4.7% on

earnings

Bull case – 6.6% on

revenue and 9.6% on

earnings

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 10

Figure 19: Base case scenario on the impact from Tmall third-party logistics

Base case assumptions regarding Tmall third-party logistics Note

Selective large items sales units on 11 Nov 2013 (mn)

- TVs 0.165

- Air conditioners 0.025

- Refrigerators 0.074

- Washing machines 0.102

- Water heaters 0.095

- Cooking & ventilation appliance 0.056

Subtotal 0.517

% of total large item sales (incl. furniture and sanitary wares) 50%

Total 11 Nov 2013E sales volume of large items on Tmall (mn) 1.03

% of full year 2013 sales units 6.37% Using Tmall GMV on 11 Nov 2012 as % of 2012

Annualised 2013 large item sales volume on Tmall (mn) 16.23

- assuming annual growth from 2013 volume 75% vs. Tmall 2012 GMV growth rate of 125%

Expected 2015 large item sales volume on Tmall (mn) 49.71

Average delivery cost (Rmb per unit in 2015E) 80 vs. Current sector average at Rmb 60-70

% allocated to Goodaymart logistics 70%

Revenue (Rmb mn) to Goodaymart logistics 2,784

Net margin 5.50% Assume 1pp improvement from 1H13's 4.5%

Net profit (Rmb mn) to Goodaymart logistics 153.1

% of total Haier Electronics (2015E)

Revenue share 3.2%

Net profit share 4.7%


We have conducted a full sensitivity analysis on the impact on 2015E revenue and

earnings.

Figure 20: Sensitivity analysis on the revenue of 2015E from Tmall third-party logistics

Annual large items sales growth rate in 2014-15E

50% 75% 100% 125% 150% 200%

Allocation to

Goodaymart

logistics

50% 1.7% 2.3% 3.0% 3.8% 4.6% 6.5%

60% 2.0% 2.8% 3.6% 4.5% 5.5% 7.7%

70% 2.4% 3.2% 4.1% 5.2% 6.3% 8.9%

80% 2.7% 3.6% 4.7% 5.9% 7.2% 10.0%

90% 3.0% 4.1% 5.3% 6.6% 8.0% 11.1%

100% 3.4% 4.5% 5.8% 7.3% 8.8% 12.2%


Figure 21: Sensitivity analysis on the earnings of 2015E from Tmall third-party logistics

Annual large items sales growth rate in 2014-15E

50% 75% 100% 125% 150% 200%

Allocation to

Goodaymart

logistics

50% 2.5% 3.4% 4.4% 5.5% 6.8% 9.5%

60% 3.0% 4.1% 5.3% 6.6% 8.0% 11.1%

70% 3.5% 4.7% 6.1% 7.6% 9.2% 12.8%

80% 4.0% 5.4% 6.9% 8.6% 10.4% 14.3%

90% 4.5% 6.0% 7.7% 9.6% 11.5% 15.8%

100% 5.0% 6.6% 8.5% 10.5% 12.7% 17.3%


We believe the independent third-party logistics may have more upside if the Tmall model

proves to be successful. The Goodaymart logistics can also tie up with other large-item

sales networks besides Tmall, which we believe will be a fast growing market in the future.

Given that the logistics business has an annual revenue of only around Rmb3 bn

compared with that of other large item logistics companies, for example, China Deppon

More upside if the Tmall

model is successful and

copied to other large-item

sales network

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 11

Logistics (德邦), which posted over Rmb10 bn of revenue in 2013 and an over 60% CAGR

in recent years, we believe Goodaymart logistics has plenty of room to grow.

Leading network on distribution, logistics and after-sales service of large items

Haier Electronics has a leading distribution platform in China, especially in Tier 3/4

markets, while the home appliance distribution is highly fragmented with lots of small scale

players and a multi-layered hierarchy. We believe Haier Electronics will benefit from the

distribution industry consolidation and a flattening management structure by providing

standardised services, detailed operational manuals and training for its franchisees and

monitoring inventory turnover efficiency. Most of the stores under Haier Electronics are

franchise stores, with only a few flagship stores operated by the company itself. The asset-

light business model helps minimise the inventory risks for the company.

Figure 22: Leading distribution platform with asset-light franchise model

No. of

stores

Focus Features

Haier community stores

- Nationwide ~3,000 T1/2 market Delivery and installation services

Haier exclusive stores

- Nationwide 30,000+ T3/4 market All Haier products, incl. white & black goods, small home appliances, 3C products, etc.

incl. county level ~8,000 E-store system at county-level stores with 85% coverage

Goodaymart stores

- Nationwide ~2,800 Rural market International brands (GE, HP, Samsung, etc.) and domestic brands (Skyworth, etc.)

incl. county level ~1,000 Develop "Turn-Key" services for third-party brands

Source: Company data, Credit Suisse

The strong distribution platform was supported by Haier Electronics' extensive logistics

network. The company has upgraded its delivery scheduling capability including better

inventory management, effective back-end IT support system, and optimised delivery routes.

Figure 23: Haier's logistics network chart as of end 2012


Leading distribution platform

in Tier 3/4 markets should

benefit from industry

consolidation

Extensive nation-wide

logistics network

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 12

By mid-2013, it had 86 logistics centres including around 10+ Tier 1 logistics centres

covering provinces in some large capital cities, owned by the company. The Tier 2

logistics centres cover different regions, while the Tier 3 ones are used for distribution in

counties and towns. Both are on a rented basis. Haier Electronics plans to increase its Tier

1 centres to 20 in total in five years.

We believe Haier Electronics' logistics network under the Goodaymart brand is difficult to

replicate, as Haier Group started investing in this logistics system in 1996 and built up an

extensive network which competitors can't replicate quickly, especially in Tier 3/4 markets

and rural areas. According to local media reports, the accumulated investment in

Goodaymart logistics has been about Rmb30-40 bn since 1996.

Figure 24: Extensive logistics network and differentiated services

Differentiated services Features

Depth Direct delivery to towns in Shandong, Shijiazhuang, Chengdu, Nanjing and Guangzhou, with 30%+ town level

markets covered

Coverage 86 TC to cover 98% of counties nationwide, including 10+ in capital cities on self-owned land and property

Speed 24-hour on-time delivery & simultaneous "delivery & installation in 400 cities and 1,500+ counties

Real-time visibility Real-time tracking system to cover the whole process


Haier Electronics has strong after-sales service capabilities, and is recognised as one of

the most extensive and well-known home appliance after-sales service providers in China.

It has over 15,000 service providers nationwide, and over 40,000 well-trained technical

engineers. It has been ranked No.1 in the Customer Satisfaction Measurement Index

(consumer durables) in China for eight years.

It is capable of providing comprehensive service to 13 external home appliance brands.

And it has expanded its after-sales service to furniture and targets to build the largest

third-party service system for furniture installation in China. We believe Haier will continue

to increase its commitment to after-sales service, especially for large household items, as

this part generated the highest gross margin (~50%) among all ICS businesses.

Third-party brands should be future sales growth drivers

Currently under ICS, around 85% of the revenue comes from Haier branded products, and

the rest from third-party brands (which grew rapidly from only 12% of ICS revenue in 2012).

For Haier Electronics, ICS accounted for over 60% of washing machine sales and over

80% of water heater sales. The company is still in the process of developing into a

professional platform for third-party brands. It also provides one-stop logistics, distribution

and after-sales services to online dealers such as JD.com, T-mall and Dang Dang.

We believe there is good growth potential for Haier Electronics' ICS business, given that

its current main products, Haier-branded products, are still a small portion of China's home

appliance market, though it has leading market shares in many white goods categories.

Figure 25: Still lot of room for growth in third-party brand sales

Mkt shr Washing machines Water heaters Air conditioners Refrigerators

1 Haier 27.7% Haier 18.7% Gree 23.9% Haier 23.8%

2 Little Swan 14.5% A.O.Smith 15.1% Midea 20.9% Hisense-Kelon 19.6%

3 Sanyo 10.1% Midea 11.0% Haier 12.9% Meiling 10.8%

4 Panasonic 7.0% Macro 9.4% Chigo 5.5% Midea 9.8%

5 Siemens 6.6% Vanward 9.0% Aux 5.5% Siemens 6.0%

Source: Company data, China Market Monitor Report

Based on our estimates, the revenue contribution from third-party brands will increase

from 12% of ICS revenue to 21% of ICS revenue in three years, therefore achieving a

strong three-year CAGR of 39.1% compared with only 11.0% for Haier-branded products.

Difficult to replicate

Goodaymart logistics in

which Haier Group started

investing since 1996

Strong after-sales service

capabilities

Target to develop third-party

logistics and service system

ICS revenue comprises 85%

from Haier brands and15%

from third-party brands

Third-party brands should

be the future growth drivers

We expect third-party

brands revenue to account

for 21% of ICS revenue in

2015E

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 13

Figure 26: We expect third-party brands' revenue contribution to increase

2012 2013E 2014E 2015E

Third party brands

Revenue as % of ICS net revenue 12% 15% 18% 21%

Revenue (Rmb mn) 5,948 8,508 11,741 16,026

YoY% 43.0 38.0 36.5

Haier brands

Implied net revenue 49,667 54,609 60,507 68,012

YoY% 10.0 10.8 12.4


Haier Electronics has plans to increase its ICS business by: (1) increasing penetration in

Tier 3/4 and rural markets; (2) more introductions of third-party brands in its stores such as

Goodaymart stores; (3) providing more value-added services such as logistics and after-

sales service which have higher margins than pure product sales; (4) expanding its

logistics network and capacity; and (5) new product category development, to strengthen

end-to-end delivery capability in large items, such as home appliances, furniture and

bathroom accessories.

E-commerce platform is expected to grow rapidly

E-commerce accounted for only 2% of Haier Electronics' revenue in 1H13, but due to its

small base, the growth rate was very rapid, e.g., its revenue grew ~500% YoY in 1H13.

We believe Haier's e-commerce platform will grow significantly in the coming few years

due to a lack of integrated online-to-offline service providers for existing online large-item

sales and a lack of penetration in Tier 3/4 markets by many existing service providers.

Figure 27: Self-developed eHaier Figure 28: Haier on Tmall

Source: www.ehaier.com Source: haier.tmall.com

Strategic initiatives to

develop ICS business

E-commerce: new but with

significant growth potential

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 14

A leading white goods player Haier Electronics is a leading manufacturer of washing machines (27.7% market share)

and water heaters (18.7% market share) in China. It has been consistently ranked No. 1 in

terms of sales volume over the past few years. We believe it will benefit from increasing

penetration of white goods products in China, especially in Tier 3/4 cities and rural markets,

which is far less than black goods' penetration in those areas. We believe the company

will continue to benefit from its focus on innovative new products, especially those that

facilitate energy savings and environmental protection, and maintain its leadership position.

Figure 29: Haier washing machines ranked No.1 globally

for four years

Figure 30: Haier's water heater market share in China has

increased steadily

8.4%9.1%

10.9%

11.8%

0%

2%

4%

6%

8%

10%

12%

14%

2009 2010 2011 2012

Global market share - single brand washing machine

20.3%

27.1%28.5%

6.0%7.6% 7.9%

0%

5%

10%

15%

20%

25%

30%

2010 2011 2012

Electric water heaters Gas water heaters

Source: Company data, Euromonitor Source: Company data, China Market Monitor Report

No. 1 market share in washing machines and water heaters in China

Haier washing machine is regarded as both the top brand and top manufacturer in China

as well as globally. According to Euromonitor's global home appliance market survey,

"Haier" brand washing machines ranked No.1 in the world globally in 2012 (and four years

consecutively) with a global market share of 11.8% in terms of single-brand sales volume.

Figure 31: Haier holds No. 1 market share in China's

washing machine sector (1H13)

Figure 32: China's washing machine market size in terms

of sales volume

Haier27.7%

Little Swan14.5%

Sanyo10.1%

Panasonic7.0%

Siemens6.6%

Midea4.8%

Whirlpool3.1%

Electrolux3.5%

Samsung2.5%

Hisense1.9%

Others18.4%

Market share in China (in terms of sales volume)

-5%

0%

5%

10%

15%

20%

25%

30%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2000 2002 2004 2006 2008 2010 2012

Sal

es v

olum

e ('0

00)

Washing machine sales volume in China YoY%

Source: Company data, China Market Monitor Report Source: CEIC, NBS

Haier Electronics has a

27.7% washing machine

market share and a 18.7%

water heater market share

in China

11.8% global market share

for Haier brand washing

machines

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 15

In order to satisfy different market segments, the company developed two more sub-brands in

China, Casarte and Leader, which have grown rapidly from a smaller base. Casarte targets the

high-end market in Tier 1/2 markets to meet upgrade demand, while Leader provides modular

customisation with high performance-to-price (good-value-for-money) products in Tier 3/4

markets, which is popular among young customers. We believe the multi-brand strategy will

help strengthen Haier Electronics' product attraction among customers.

Figure 33: Haier holds No. 1 market share in China water

heater sector (1H13)

Figure 34: Market size of electric water heater in China in

terms of sales volume

Haier18.7%

A.O.Smith15.1%

Midea11.0%

Macro 9.4%

Vanward9.0%

Whirlpool4.8%

Ariston3.5%

Vatti3.3%

Rinnai2.9%

Noritz2.9%

Others19.3%

Market share in China (in terms of sales volume)

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

5,000

10,000

15,000

20,000

25,000

30,000

2005 2006 2007 2008 2009 2010 2011 2012S

ales

vol

ume

('000

)

Water heater sales volume - Electric YoY%

Source: Company data, China Market Monitor Report Note: The gas water heater sales volume was NA, but its production

volume was 46% of electric ones in 2012; Source: CEIC, NBS

Haier water heaters include three product categories—electric, gas and solar water

heaters. The company has a dominant market share in electric water heaters, is growing

fast in gas ones (e.g., 30%+ sales volume growth in 2012), and is broadening its product

categories with solar and heat pump water heaters. We expect steady growth in Haier's

water heaters business in the coming years.

Potential beneficiary of rural penetration rate increase

We believe penetration of Haier Electronics' products in rural China still has room to grow.

Figure 35: The penetration rate of washing machines in

China (per 100 households)

Figure 36: The penetration rate of water heaters in China

(per 100 households)

0

10

20

30

40

50

60

70

80

90

100

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

%

Rural penetration rate Urban penetration rate

0

10

20

30

40

50

60

70

80

90

100

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

Urban penetration rate

Source: CEIC, NBS Source: Company data, NBS

Multi-brand strategy to cover

both high-end and low-end

(value for money) customers

Dominant market share in

electric water heaters;

developing fast in gas, solar

and other new products

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 16

As shown in Figure 35, the rural penetration rate of washing machines still has plenty of

room to grow although it had increased from 28.6 per 100 households in 2000 to 67.2 per

100 households in 2012. It's still far below the 98.0 per 100 households urban penetration

rate in China in 2012. As for the water heaters business, urban penetration has rapidly

grown over the past ten years to 91.0% in 2012. Although rural penetration data are

unavailable, we believe it should be much lower than the urban one, therefore the growth

potential is still positive for Haier Electronics, especially as it focuses on Tier 3/4 and rural

areas.

Overall, white goods penetration in rural China is still far below that of black goods (TVs)

as shown in Figure 37, which we believe is partly due to a weak distribution network and

logistics services in those areas, not to mention the lack of after-sales service providers.

We believe the growing penetration trend in rural areas will benefit Haier Electronics in

coming years, especially for its ICS business and the development of independent third-

party brands' distribution and logistics.

Figure 37: White goods penetration in rural areas is much lower than that of black goods

98.091.0

126.8

98.5

136.1

67.2

25.4

67.3

116.9

0

20

40

60

80

100

120

140

160

Washing machines Water heaters Air conditioners Refrigerators TV

Urban Rural

Source: CEIC, NBS

Strategic focus on trendy and innovative new products

Haier Electronics has been developing new products leveraging on its open interactive

product development platform. The company has made a strong commitment and

progress in energy-saving and green technology, e.g., the technology of filtering washing

and rinse water with ultrafiltration membranes, which raises the sterilisation rate to over

99% and reduces water consumption by over 40% at the same time. In water heater

products, its X1 gas water heater series carries the third-generation thermostatic

technology which limits the thermostatic deviation to less than 0.5°C and the advanced

condensing technology which improves the thermal efficiency to 103.4%, significantly

increasing energy saving and environmental protection. We believe Haier Electronics will

benefit from the market trend and potential government requirements on products with

more focus on energy saving and environmental protection.

The company also focuses on the development of smart appliances under the smart home

concept. For example, the newly developed Haier U-Home washing machines support Wi-

Fi connection and real-time monitoring of washing progress with remote control via mobile

phones, computers, etc.

Rural penetration of

washing machines and

water heaters still has plenty

of room to grow

The ICS business will

probably be driven by lower

penetration of white goods

than black goods

Product innovation focuses

on energy-saving and green

technology

Smart appliance is also an

important future direction

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 17

Earnings forecasts and valuation We expect Haier Electronics to achieve a 16.0% three-year revenue CAGR and a 23.2%

three-year EPS CAGR over 2013-15 driven by strong growth in integrated channel

services with top-line growth amid market consolidation and margin expansion. The third-

party brands should be the main growth driver, together with higher contributions from

logistics, services and e-commerce. We believe that the Haier-branded products will grow

steadily in future and maintain their leading market share.

Haier Electronics is trading at 18.8x 2014E or 14.4x 2015E P/E. Excluding its net cash on

hand, the stock is trading at 14.8x 2014E or 11.3x 2015E ex-cash P/E. We believe the

increasing earnings contribution from the ICS business will continue to create

opportunities for a re-rating. By 2016, we forecast the profit contribution will increase to

55% (from 32% in 2013E).

We have used sum-of-the-parts valuation—11.5x target P/E for the washing machine

business, 14.5x for the water heater business, and 24.0x for the ICS business, with

reference to comps companies in each sector, and weighted by segment profit contribution.

Our target price of HK$30.0 is based on an average 18.9x target 2015E P/E weighted by

sector profit share, implying 31% potential upside. Our target price implies 0.8x target PEG.

If we exclude the expected net cash on hand, our target price implies only15.8x 2015E ex-

cash P/E. We initiate coverage on Haier Electronics with an OUTPERFORM rating. We

believe the potential upside may come from faster growth and higher earnings contribution

from the ICS business, especially with greater business opportunities from the alliance

with Alibaba.

Earnings forecasts

We forecast 13.5%/15.8%/18.8% net revenue growth in 2013 through 2015, respectively,

(or a 16.0% three-year CAGR), driven by the increasing contribution from integrated

channel services (ICS), which we expect to achieve a 15.5% three-year CAGR, as well as

the new independent third-party logistics business with the tie-up of Alibaba.

Figure 38: Revenue forecasts

2010 2011 2012 2013E 2014E 2015E

Net revenue

Washing machines 6,676 4,887 5,198 5,550 6,105 6,715

Water heaters 1,408 549 849 849 916 1,008

Integrated channel services 28,710 44,654 49,569 56,719 65,226 76,315

Tmall logistics contribution 0 0 0 0 826 2,784

Total 36,794 50,090 55,615 63,117 73,074 86,822

Gross revenue

Washing machines 11,519 12,215 13,277 14,605 16,066 17,672

Water heaters 3,126 3,828 4,489 4,714 5,091 5,600

Integrated channel services 29,264 45,377 50,769 57,876 66,558 77,872

Tmall logistics contribution 0 0 0 0 826 2,784

Total 43,909 61,421 68,535 77,195 88,540 103,928

Gross revenue YoY%

Washing machines 25.4 6.0 8.7 10.0 10.0 10.0

Water heaters 33.3 22.5 17.3 5.0 8.0 10.0

Integrated channel services 1,603.9 55.1 11.9 14.0 15.0 17.0

Tmall logistics contribution n.m. n.m. n.m. n.m. n.m. 236.9

Total 231.4 39.9 11.6 12.6 14.7 17.4


For 2013E alone, we expect 14.8% YoY revenue growth in 4Q13E or 13.5% for the full

year. We believe the negative impact of the termination of the energy saving subsidy

programme has already been fully digested in 2Q13.

We forecast a 16.0%

revenue CAGR and a 23.2%

EPS CAGR in 2013-15E

Re-rating on higher ICS

profit contribution

Our target price of HK$30.0

is based on an 18.9x SOTP

target 2015E P/E

Revenue growth mainly

driven by ICS and the

independent Tmall third-

party logistics

We forecast 14.8% gross

revenue growth in 4Q13

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 18

Figure 39: 2013 quarterly revenue Figure 40: 2013 quarterly revenue YoY change

0

5,000

10,000

15,000

20,000

25,000

1Q13 2Q13 3Q13 4Q13E

Rm

b m

n

Washing machines Water heaters Integrated channel services

-15

-10

-5

0

5

10

15

20

25

1Q13 2Q13 3Q13 4Q13E

YoY

%

Washing machines Water heaters Integrated channel services


As for margins, we expect both gross and operating margins for washing machines and

water heaters to remain stable, as these are mature businesses for the company and

further margin upside may be limited as it is important for the company to maintain a

leading market share. The change in gross margin for water heaters in 1H13 (-7.5 pp YoY),

was mainly due to the accounting adjustment by taking out the installation revenue and

margin from water heaters and putting them under ICS now. We believe this accounting

change won't affect the company's profitability, just the segment breakdown.

We expect ICS' business margin to improve gradually with: (1) improving efficiency in the

distribution and logistics network; (2) increasing contribution from higher-margin service

businesses; and (3) economies of scale for the growing logistics and e-commerce

operations. The termination of the Argos JV (with Home Retail Group) in 2H12 has been

fully accounted for with one-off losses (Rmb106 mn), therefore it won't be a drag on

profitability any more.

Figure 41: Margin forecasts

2010 2011 2012 2013E 2014E 2015E

Gross margin on gross revenue (%)


Water heaters 42.5 41.9 43.0 34.5 34.5 34.5

Integrated channel services 3.1 7.3 8.2 9.0 9.6 10.2

Tmall logistics contribution 10.5 11.0

Total gross margin 12.5 13.5 14.3 14.0 14.2 14.4

Reported gross margin 13.1 15.0 16.1 15.5 15.7 15.7

Operating margin on gross revenue (%)


Water heaters 10.2 10.0 11.1 12.0 12.0 12.0

Integrated channel services 1.6 1.6 1.4 1.5 2.0 2.4

Tmall logistics contribution 6.5 7.0

Total operating margin 3.8 3.3 3.4 3.4 3.7 4.0

Reported operating margin 3.9 3.7 4.3 4.3 4.7 5.0


We forecast 17.8/26.7/27.7% net profit growth in 2013 through 2015, respectively (a

24.0% three-year CAGR). Due to the potential dilution from the issue of CBs and warrants,

diluted EPS growth is slightly lower, at a 23.2% three-year CAGR in 2013-15E. For 4Q13E

specifically, we forecast Rmb608 mn net profit, +16.0% YoY.

We expect margin

expansion mainly from the

ICS business

ICS margin may benefit

from improving efficiency

and higher contribution from

service business

We forecast 16.0% net profit

growth in 4Q13E

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 19

Figure 42: Net profit forecasts Figure 43: 2013 quarterly net profit

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2010 2011 2012 2013E 2014E 2015E

%

Rm

b m

n

Net profit YoY%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0

100

200

300

400

500

600

700

1Q13 2Q13 3Q13 4Q13E

%

Rm

b m

n

Net profit YoY%


We expect Haier to continue its prudent control of working capital with the cash conversion

cycle being below 40 days. We also expect it to maintain a strong cash position. As of

1H13, the company had net cash on hand of Rmb5.1 bn, or an 81% net cash-to-equity

ratio.

The company's dividend payout ratio is only ~10%, which we believe may be increased,

given that the company has completed a large amount of investment in ICS in the past few

years. There is no promise from management though. Further use of cash may be for

potential M&A opportunities.

Figure 44: Working capital turnover days Figure 45: Strong net cash on hand

-80

-60

-40

-20

0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

No.

of d

ays

Inventory AR AP Cash conversion cycle

0.0

20.0

40.0

60.0

80.0

100.0

120.0

0

2,000

4,000

6,000

8,000

10,000

12,000

2007 2009 2011 2013E 2015E

%

Rm

b m

n

Net cash Net cash to shareholders' equity (%)


Prudent working capital

control; strong cash position

Dividend payout ratio may

be increased, but may

depend on M&A

opportunities

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 20

Valuation

Haier Electronics is trading at 18.8x 2014E or 14.4x 2015E P/E. Excluding its net cash on

hand, the stock is trading at 14.8x 2014E or 11.3x 2015E ex-cash P/E. We have put all

comparable companies in Figure 53, including white goods players, distributors and

logistics players, as well as some black goods companies. We found China washing

machine players are trading at an average 10.5x 2015E P/E, water heater players at an

average 14.6x 2015E P/E, and distributors at 27.9x 2015E P/E. The distributors' valuation

may not be a good reference given the business volatility the distributors are experiencing.

We believe Haier Electronics has higher potential price upside given its large exposure to

integrated channel services, which should be a much more value added business than

pure white goods manufacturing and sales. The value-adding logistics, service and e-

commerce businesses may provide significant upside in the long run as China is still weak

in this aspect on large items. We believe Haier Electronics' share price has partly reflected

the re-rating in recent years with increasing earnings contribution from the ICS business.

Figure 46: Operating profit contribution from ICS is expect to grow from 32% in 2013 to

55% in 2016

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 2013E 2014E 2015E 2016E

Integrated channel services Washing machines & water heaters


We recall that e-commerce in the US had developed rapidly before 2004-05, therefore we

refer to the forward P/E for US-based logistics companies FedEx and UPS during the five

years from 2000 to 2004 as valuation reference for Haier Electronics' ICS business. These

two companies were trading at an average forward P/E of 18.8x and 25.4x, respectively,

during the period. As Haier Electronics' ICS business has specialised on large-item goods,

including not just logistics, but also value-added installation and after-sales services, we

believe the entry barrier is higher than standard-size parcels. As a result, we decide to give

the ICS business a target P/E multiple of 24x, close to the high end of the reference range.

Our valuation base is 2015E. We used 11.5x target P/E for the washing machine business,

14.5x for the water heater business, and 24.0x for the ICS business, with reference to

comps companies in each sector. The sum-of-the-parts valuation is based on the

company's segment profit contribution percentage in 2016E. Our target price of HK$30.0

is based on the SOTP-implied 18.9x target 2015E P/E, implying 31% potential upside. Our

target price implies 0.8x target PEG based on a 23.2% three-year EPS CAGR in 2013-15E.

If we exclude the expected net cash on hand, it implies 15.8x 2015E ex-cash P/E only.

We initiate coverage on Haier Electronics with an OUTPERFORM rating. We believe the

potential upside may come from faster growth and higher earnings contribution from the

ICS business, especially with greater business opportunities from the tie-up with Alibaba.

Currently trading at 18.8x

2014E or 14.4x 2015E P/E

Re-rating on increasing

contribution from ICS

US logistics comps as

reference for ICS valuation

SOTP-based target price of

HK$30.0 is based on the

blended 18.9x target 2015E

PE

Alibaba tie-up may result in

higher upside

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 21

Figure 47: SOTP valuation (2015E valuation base)

Segment profit

share

Target 2015E

P/E (x)

Valuation basis

Washing machines 30.1% 11.5 Washing machine comps

Water heaters 14.6% 14.5 Water heater comps

ICS 55.3% 24.0 Logistics companies FedEx and UPS in 2000-2004

SOTP valuation 100.0% 18.9 Sum of the parts


The biggest valuation variation should come from the target P/E given to the ICS business.

We assume different target P/Es for the ICS business and get a scenario analysis on

related SOTP P/Es and target prices as show in Figure 48.

Figure 48: Target P/E scenario analysis

Bear Base case Bull

ICS target P/E 15.0 17.0 20.0 24.0 25.0 27.0 30.0

SOTP target P/E 13.9 15.0 16.6 18.9 19.4 20.5 22.2

Target price (HK$) 22.0 23.8 26.3 30.0 30.8 32.5 35.2

Potential upside -4% 4% 15% 31% 35% 42% 54%


Figure 49: Forward P/E band chart Figure 50: Historical average forward P/E at 12x

0

5

10

15

20

25

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

16.0x

12.0x

8.0x

4.0x

20.0x(HK$)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Average 12.0x


Figure 51: Forward P/B band chart Figure 52: Historical average forward P/B at 2.8x

0

5

10

15

20

25

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

3.8x

2.8x

1.8x

0.8x

4.8x

(HK$)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Average 2.8x


Target PE scenario analysis

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 22

Figure 53: Valuation comps

Mkt Price EPS growth P/E P/B Yield

cap (Loc (%) (x) (x) (%) Price Performance

Name Ticker US$ mn curr) CY14E CY15E CY14E CY15E CY14E CY15E CY14E 1M 3M 1Y

Haier Electronics 1169.HK 7,594 22.85 27.0 24.8 18.0 14.4 4.4 3.4 0.6 12.6 42.3 93.3

Comprehensive

Qingdao Haier 600690.SS 8,879 19.75 14.9 19.3 11.6 9.8 3.1 2.5 2.5 8.6 19.3 39.5

Hisense Kelon – H 0921.HK 627 10.58 21.6 30.2 7.6 5.9 3.0 1.9 2.8 -4.9 55.1 185.9

Hisense Kelon – A 000921.SZ 1,527 10.33 21.6 30.2 9.4 7.3 3.7 2.3 2.2 -8.9 5.8 39.4

TCL Corp. 000100.SZ 3,202 2.28 23.4 27.0 8.3 6.6 1.3 1.1 3.9 0.0 -7.7 -8.1

Changhong 600839.SS 2,662 3.49 10.0 n.a. 31.7 n.a. 1.1 n.a. 0.9 17.1 29.3 63.8

Meiling 000521.SZ 448 4.51 21.9 19.4 10.8 9.1 1.0 0.9 2.8 -9.4 11.4 5.6

Aucma 600336.SS 549 4.87 n.a. n.a. n.a. n.a. n.a. n.a. n.a. -5.4 -18.8 84.5

Midea Group 000333.SZ 13,238 47.51 20.1 18.4 9.1 7.7 2.3 1.8 3.8 -8.2 0.2 n.a.

Whirlpool WHR.N 12,311 156.84 21.5 15.8 12.8 11.0 2.2 1.8 1.8 1.0 7.3 53.3

Average 19.4 22.9 12.7 8.2 2.2 1.8 2.6 -1.1 11.3 58.0

Washing machines

Little Swan 000418.SZ 632 8.67 21.1 14.5 10.3 9.0 1.2 1.1 2.2 -7.5 -1.0 -10.3

Hefei Sanyo 600983.SS 1,181 13.41 23.7 19.2 14.5 12.1 2.8 2.5 1.4 -14.7 13.9 71.5

Average 22.4 16.8 12.4 10.5 2.0 1.8 1.8 -11.1 6.5 30.6

Water heaters

Macro 000533.SZ 452 3.96 n.a. n.a. n.a. n.a. n.a. n.a. n.a. -5.3 -3.6 -4.1

Vatti 002035.SZ 500 10.11 26.6 15.4 9.7 8.4 2.0 1.7 2.9 -15.0 -15.8 3.1

Vanward 002543.SZ 760 11.50 -1.6 25.8 14.1 11.2 1.1 1.5 4.0 -8.6 -6.4 143.8

Taiwan Sakura 9911.TW 186 20.30 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1.2 6.8 18.4

Rinnai 5947.T 4,132 8,270 4.9 6.3 19.6 18.4 2.0 1.8 0.8 6.7 11.5 31.5

Noritz 5943.T 1,113 2,280 11.5 8.7 15.8 14.6 1.1 1.0 1.3 2.7 3.7 46.2

A O Smith AOS.N 4,757 52.15 11.1 12.7 22.9 20.3 3.2 2.8 1.0 -3.4 1.5 54.4

Average 10.5 13.8 16.4 14.6 1.9 1.8 2.0 -3.1 -0.3 41.9

Air-conditioner

Chigo 0449.HK 201 0.19 120.0 12.1 5.6 5.0 0.4 0.4 4.9 -1.6 5.7 -28.8

GREE 000651.SZ 14,696 29.57 18.0 17.4 7.5 6.4 2.1 1.7 3.5 -3.0 8.5 4.5

Chunlan 600854.SS 346 4.03 n.a. n.a. n.a. n.a. n.a. n.a. n.a. -9.0 -11.4 0.8

Average 69.0 14.8 6.6 5.7 1.3 1.0 4.2 -4.6 0.9 -7.9

TVs

Skyworth Digital 0751.HK 1,476 4.08 16.2 8.9 5.7 5.2 0.9 0.8 5.5 -3.1 8.8 -10.1

TCL Multimedia 1070.HK 543 3.16 42.5 25.7 6.5 5.2 0.8 0.7 4.7 -11.0 -7.6 -37.2

Hisense 600060.SS 2,348 10.86 13.1 11.6 6.8 6.1 1.3 1.2 3.8 -5.6 -9.8 -2.7

Konka 000016.SZ 487 3.69 n.a. n.a. n.a. n.a. n.a. n.a. n.a. -2.9 -1.6 8.5

Average 23.9 15.4 6.3 5.5 1.0 0.9 4.6 -5.6 -2.6 -10.4

Distributors

GOME 0493.HK 2,742 1.26 43.1 27.4 15.5 12.2 1.0 1.0 1.7 -6.7 8.6 27.3

Suning 002024.SZ 11,662 9.56 15.7 64.7 71.9 43.7 2.4 2.3 0.3 -1.6 -23.0 27.5

Average 29.4 46.0 43.7 27.9 1.7 1.6 1.0 -4.2 -7.2 27.4

Logistics

FedEx FDX.N 43,871 140.51 21.6 23.5 17.3 14.0 2.3 2.0 0.5 -1.5 8.3 40.8

UPS UPS.N 92,751 99.91 15.7 13.6 18.4 16.2 28.8 25.7 2.7 -3.3 6.5 24.5

DHL DPWGn.DE 43,506 26.60 9.0 13.6 16.1 14.2 2.8 2.5 3.1 0.9 7.2 54.1

Average 15.4 16.9 17.3 14.8 11.3 10.1 2.1 -1.3 7.4 39.8

Source: Company data, Credit Suisse estimates for Haier Electronics, IBES for all other companies' estimates. Prices as of 20 Jan 2014

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 23

Figure 54: Business comps

Revenue

Name Ticker (US$mn) Business description (revenue breakdown)

Haier Electronics 1169.HK 9,189 Washing machine 9%, water heater 2%, integrated channel services 89%

Comprehensive

Qingdao Haier 600690.SS 13,124 Refrigerator 32%, air conditioner 19%, washing machine 17%, logistic services 16%, others 16%

Hisense Kelon 0921.HK 3,133 Refrigerator 45%, air conditioner 35%, other household appliances 20%

TCL Corp. 000100.SZ 11,437 Multimedia 47%, IT distribution 19%, mobile phone 14%, others 20%

Changhong 600839.SS 8,586 Multimedia 33%, IT products 23%, household appliances 18%, others 26%

Meiling 000521.SZ 1,523 Refrigerator 68%, air conditioner 26%, others 6%

Aucma 600336.SS 658 Refrigerator 64%, other white goods 12%, electric bicycle 17%, others 7%

Midea Group * 000333.SZ 11,248 Major appliance (air conditioner, washing machine, refrigerator and compressor) 93%, others 7%

Whirlpool WHR.N 18,143 Washing machine 30%, refrigerator 30%, home cooking appliances 17%, others 23%

Washing machines

Little Swan 000418.SZ 1,135 Washing machine 90%, others 10%

Hefei Sanyo 600983.SS 660 Washing machine 85%, refrigerator 6%, others 9%

Water heaters

Macro 000533.SZ 324 Water heater 94%, others 6%

Vatti 002035.SZ 409 Water heater 23%, smoke exhaust 34%, cooking appliances 30%, others 13%

Vanward 002543.SZ 500 Water heater 50%, peripheral accessories 43%, others 7%

Taiwan Sakura 9911.TW 132 Water heater 41%, kitchen appliances 53%, others 6%

Rinnai 5947.T 2,418 Water heater 51%, kitchen appliances 31%, air conditioner 6%, others 12%

Noritz 5943.T 1,796 Water heater and air conditioner 100%

A O Smith AOS.N 1,939 Water heaters products 100%

Air-conditioner

Chigo 0449.HK 1,454 Air conditioner 97%, others 3%

GREE 000651.SZ 16,444 Air conditioner 89%, others 11%

Chunlan 600854.SS 122 Air conditioner 69%, others 31%

Distributors

GOME 0493.HK 7,909 Black goods 23%, refrigerator & washing machine 18%, communication products 16%, air

conditioner 14%, small appliances 12%, others 17%

Suning 002024.SZ 16,200 Black goods 22%, IT products 19%, communication products 17%, white goods 16%, small

appliances 13%, air conditioner 11%, others 4%

TVs

Skyworth Digital 0751.HK 4,878 TV 80%, set-top box 10%, others 10%

TCL Multimedia 1070.HK 5,118 TV 88%, others 12%

Hisense 600060.SS 4,161 TV 89%, others 11%

Konka 000016.SZ 3,018 TV 79%, mobile phone 8%, others 15%

Note: All data as of reported in the last full year financial report, except for Midea Group with last data as of Year 2011.


21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 24

Investment risks Key investment risks for Haier Electronics include weakness in economic growth and an

end-market demand slowdown, regulatory and stimulative policy changes, difficulty in

growing third-party brand sales, possible raw materials and/or labour cost hikes, the failure

of working capital and franchisee controls, as well as corporate governance risks such as

those from connected party transactions.

Risks of economic growth and end-market demand

We believe certain macroeconomic factors and the potential risk of an economic growth

slowdown are some of the key investment risks to Haier Electronics. As a consumer

durable products distributor and channel services provider, we believe overall economic

growth, stability in the residential property market, and disposable income growth would

affect end-market demand for Haier Electronics' products and services. Should there be a

slowdown in domestic economic activities or a sudden contraction in property transaction

volumes, some of Haier Electronics' business segments would likely be adversely affected.

Policy risks regarding energy saving, environmental protection, subsidy, etc.

China has experienced several rounds of multi-year household appliance supportive

policies in recent times, mainly including home appliances in the countryside, swapping

“old for new”, and the energy-saving subsidy programme. Overall, these policies are

favourable to the China household appliance industry and market players, as they

stimulate end-demand, safeguarding manufacturers from the export order tumbles post

the global financial crisis, and encouraging upgrades to high technological and

environmentally friendly models. However, the side effects of these policies also include

pre-exhausting market demand, intervening in the industry cycle and hindering market

consolidation. We believe any likely new policies focused on energy saving and

environmental protection (e.g. the widely talked about "Energy-saving Leader Plan") are

the swing risks for Haier Electronics, since such programmes may affect market demand

for certain products.

Figure 55: China's household appliance subsidy programmes

Policy Start date End date Content

Home Appliances to the

Countryside

Pilot –

November 2007;

Formal implementation

- December 2008;

Fully expansion -

February 2009

Four years according

to the start date.

Last batch expired in

January 2013

China Ministry of Finance and Ministry of Commerce launched

the subsidy programme. The rural consumers received 13% of

subsidy from the central (80%) and local (20%) governments

when they purchased the eligible household appliance products.

Eligible categories included colour TVs, refrigerators, handsets,

washing machines, air conditioners, water heaters, computers,

microwave ovens, and induction cookers. Each category had a

price cap.

Swapping “old for new” May 2009 December 2011 China’s State Council launched the Rmb2 bn “old for new”

subsidy programme to encourage the replacement of old home

appliances in urban areas. Buyers who sell five kinds of old

home appliances (TVs, refrigerators, washing machines, air-

conditioners and personal computers) to government-

designated dealers and purchase new ones received a subsidy

equal to 10% of the sales price of the new appliances. Each

category had a subsidy cap.

Energy saving subsidy

program

June 2012 May 2013 China State Council launched the energy-saving consumption

subsidy programme. Consumers who bought eligible energy-

saving products within five types of home appliances—TVs, air

conditioners, washing machines, water heaters and refrigerators

(aggregate subsidy amount ~Rmb26.5 bn), and energy-saving

vehicles, LED lighting and electric motors (aggregate subsidy

amount ~Rmb9.8 bn) were subsidized.

Source: China Ministry of Finance, China Ministry of Commerce, China's State Council

Risk factors: economy, end-

demand, policy, cost and

working capital, etc.

Economic risks: disposable

income growth, residential

property market, economic

growth, etc.

Policy risks may affect

market demand for certain

products

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 25

Risks of growing sales of third-party brands

Revenue from third-party brands is one of our key assumptions for the future growth of

Haier Electronics, which we expect to grow from the current 15% of ICS revenue to 21% in

2015. The difficulty in growing the third-party brands is the potential cannibalisation of

Haier brand sales or concerns by third-party brand owners in terms of competition. We

believe it's crucial for the company to develop an independent platform for distribution,

logistics and services provided by third-party brands. The failure to grow the revenue from

third-party brands may affect the company's revenue growth and earnings.

Risks from costs, such as raw materials and labour

Cost control is an essential risk factor given that the traditional household appliance

retailing and marketing model is facing greater challenges from the booming e-commerce

market and low price competition. For Haier Electronics' manufacturing business, raw

materials accounted for ~60% of COGS. Therefore, the volatility in raw material prices,

such as copper, is a potential risk to profitability. Labour cost is another key area to

monitor, especially regarding the company's sales team, logistics and service providers.

For example, the Goodaymart business has over 3,000 sales workers who are important

assets to the company's distribution network. Labour cost increases should be monitored

closely.

Risks of working capital control and franchisee control

Given the company’s large retail network, we believe working capital management is of

essential importance for its sustainable development, especially the account receivable

turnover and inventory turnover, not just for the company but also including the retail-end

management by its franchisees. Haier Electronics' inventory turnover days increased from

11 days in 2010 to 18 days in 2012 with fast distribution network expansion. Its cash

conversion cycle was 37 days in 2012 which we expect the company to maintain. A failure

in working capital control may jeopardise its cash flow and profitability

Corporate governance risks from connected party transactions

Historically, Haier Electronics has worked closely with its parent Haier Group and Haier

Group's other subsidiaries. Haier Group injected the washing machine and water heater

businesses into the company in 2006, and Goodaymart which started the development of

the integrated service business in 2010. Such connected party transactions shaped the

business profile of Haier Electronics. At the same time, the company's ICS business sells

Haier-branded products made by other subsidiaries of the Group, including Qingdao Haier.

We believe these connected party transactions should be monitored closely to minimise

any potential unjustified and detrimental impact on minority investors' interests.

We believe it's crucial to

develop an independent

platform for ICS for third-

party brands to reduce the

risks

Raw material volatility and

sales staff salary hikes may

affect the company's

profitability

Working capital control is

crucial for Haier Electronics'

franchisee management and

cash flows

The connected party

transactions include M&A

opportunities and cross-

selling of Haier Group's

products, and therefore

should be monitored closely

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 26

Appendix I: Financial statements Figure 56: Haier Electronics—income statement

Rmb mn 2010 2011 2012 2013E 2014E 2015E

Turnover 36,794.5 50,089.9 55,615.0 63,117.1 73,074.0 86,821.9

Cost of sales -31,966.7 -42,582.6 -46,673.9 -53,308.6 -61,635.0 -73,215.0

Gross profit 4,827.8 7,507.3 8,941.2 9,808.5 11,439.1 13,606.9

Other revenue 63.1 78.2 70.4 94.7 109.6 130.2

Selling & distribution expenses -2,538.1 -4,157.3 -4,569.5 -5,031.3 -5,689.5 -6,510.0

Admin expenses -917.9 -1,573.0 -2,046.4 -2,171.4 -2,466.9 -3,000.9

Other expenses and losses -1.1 -0.1 -16.7 16.9 69.6 149.3

Operating profit 1,433.8 1,855.1 2,379.0 2,717.3 3,461.9 4,375.6

D&A 81.3 95.2 111.4 120.7 132.1 156.9

EBITDA 1,515.1 1,950.3 2,490.4 2,838.0 3,594.1 4,532.5

Finance income 11.0 21.2 35.9 54.5 74.8 89.4

Finance costs -5.2 -22.5 -64.5 -125.8 -185.0 -185.0

Share of profit of a JV 5.3 0.0 0.0 0.0 0.0 0.0

Extraordinary 0.0 0.0 -106.1 0.0 0.0 0.0

Profit before taxation 1,444.9 1,853.9 2,244.3 2,646.0 3,351.8 4,280.0

Taxation -429.1 -386.9 -537.3 -635.1 -804.4 -1,027.2

Profit for the period 1,015.7 1,466.9 1,707.0 2,011.0 2,547.4 3,252.8

Minority interests -41.5 -59.5 -11.9 -14.0 -17.7 -22.6

Profit to equity shareholders 974.2 1,407.5 1,695.1 1,997.0 2,529.7 3,230.2

Basic EPS (Rmb) 0.473 0.612 0.707 0.793 0.979 1.239

Diluted EPS (Rmb) 0.411 0.556 0.662 0.781 0.992 1.238

DPS (Rmb) 0.00 0.00 0.07 0.08 0.10 0.12

Dividend payout ratio 0.0 0.0 9.3 10.0 10.0 10.0

Margins (%)

Gross margin 13.1 15.0 16.1 15.5 15.7 15.7

Operating margin 3.9 3.7 4.3 4.3 4.7 5.0

S&D / Sales 6.9 8.3 8.2 8.0 7.8 7.5

Admin / Sales 2.5 3.1 3.7 3.4 3.4 3.5

EBITDA margin 4.1 3.9 4.5 4.5 4.9 5.2

PBT margin 3.9 3.7 4.0 4.2 4.6 4.9

Net margin 2.6 2.8 3.0 3.2 3.5 3.7

Effective tax rate 29.7 20.9 23.9 24.0 24.0 24.0

YoY (%)

Revenue 185.7 36.1 11.0 13.5 15.8 18.8

Gross profit 49.8 55.5 19.1 9.7 16.6 19.0

EBITDA 107.5 28.7 27.7 14.0 26.6 26.1

Operating profit 124.7 29.4 28.2 14.2 27.4 26.4

PBT 124.1 28.3 21.1 17.9 26.7 27.7

PAT 103.4 44.4 16.4 17.8 26.7 27.7

Net profit 117.1 44.5 20.4 17.8 26.7 27.7

Diluted EPS 99.4 35.2 19.1 18.0 27.0 24.8

ROE (%) 45.8 42.4 35.4 29.0 26.7 26.3

ROA (%) 12.4 12.1 10.5 9.7 10.1 10.8


21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 27

Figure 57: Haier Electronics—balance sheet

Rmb mn 2010 2011 2012 2013E 2014E 2015E

Cash & cash equivalents 2,737.4 3,961.8 5,368.3 8,824.2 10,650.8 12,619.9

Pledged deposits 3.0 87.4 61.8 61.8 61.8 61.8

Trade & bills receivables 3,931.7 5,581.4 6,924.1 7,255.6 8,760.6 10,268.9

Prepayments and other receivables 653.8 870.5 1,207.2 1,662.2 1,906.7 2,238.5

Inventories 1,358.3 2,114.7 2,479.2 3,362.8 3,391.7 4,631.9

Total current assets 8,684.3 12,615.8 16,040.6 21,166.8 24,771.6 29,821.0

PP&E 863.9 990.2 1,308.8 1,161.4 1,538.7 1,892.2

Investment properties 20.8 19.1 14.7 13.6 12.5 11.4

Prepaid land lease payments 171.2 259.4 254.7 249.5 244.3 288.8

Intangible assets 1.0 79.8 74.7 74.5 73.7 72.4

Goodwill 0.0 0.0 0.0 6.1 6.1 6.1

Available-for-sale investments 8.6 8.6 2.9 2.9 2.9 2.9

Prepayments for items of PP&E 0.0 0.0 61.2 61.2 61.2 61.2

Deferred tax assets 221.3 382.6 455.6 501.2 551.3 606.4

Total non-current assets 1,286.8 1,739.8 2,172.7 2,070.4 2,490.8 2,941.4

Total assets 9,971.1 14,355.6 18,213.3 23,237.2 27,262.3 32,762.4

Trade & bills payables 1,561.4 2,550.9 2,961.5 3,464.7 3,965.2 4,860.7

Other payables and accruals 4,457.7 5,326.5 6,494.6 6,998.8 8,046.1 9,439.5

Bank loans 5.0 25.0 39.8 39.8 39.8 39.8

Provisions 292.0 466.5 534.3 574.1 617.7 665.7

Current taxation 616.3 619.4 837.5 753.7 678.4 678.4

Put option liabilities 0.0 0.9 53.6 53.6 53.6 53.6

Total current liabilities 6,932.4 8,989.2 10,921.3 11,884.8 13,400.8 15,737.6

Convertible bonds 0.0 669.8 699.6 2,015.7 2,015.7 2,015.7

Due to non-controlling shareholders 0.0 0.0 59.5 59.5 59.5 59.5

Provisions 151.6 224.9 266.9 286.8 308.5 332.5

Deferred income 43.6 42.9 42.2 42.2 42.2 42.2

Deferred tax liabilities 9.3 8.8 8.8 8.8 8.8 8.8

Put option liabilities 0.0 114.1 374.7 374.7 374.7 374.7

Total non-current liabilities 204.4 1,060.6 1,451.7 2,787.7 2,809.4 2,833.4

Share capital 2,248.8 2,337.9 2,501.2 2,513.5 2,515.1 2,516.6

Equity component of convertible bonds 0.0 149.2 149.2 149.2 149.2 149.2

Reserves 357.0 1,538.2 2,731.8 5,587.5 8,055.7 11,170.8

Proposed final dividend 0.0 0.0 157.5 0.0 0.0 0.0

Total shareholders' equity 2,605.8 4,025.4 5,539.7 8,250.3 10,720.0 13,836.7

Minority interests 228.5 280.4 300.5 314.5 332.2 354.8

Total equity 2,834.3 4,305.8 5,840.2 8,564.7 11,052.2 14,191.4

Total liabilities and equity 9,971.1 14,355.6 18,213.3 23,237.2 27,262.3 32,762.4

Net cash / equity 104.9% 81.2% 83.6% 82.0% 80.2% 76.4%

Turnover days

Inventory 10.7 14.9 18.0 20.0 20.0 20.0

Trade & other receivables 36.1 34.7 41.0 41.0 40.0 40.0

Trade & other payables 18.3 17.6 21.6 22.0 22.0 22.0


21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 28

Figure 58: Haier Electronics—cash flow statement

Rmb mn 2010 2011 2012 2013E 2014E 2015E

Pre-tax profit 1,444.9 1,853.9 2,244.3 2,646.0 3,351.8 4,280.0

Taxes paid -135.6 -545.2 -392.2 -764.4 -929.9 -1,082.3

Finance costs 5.2 22.5 64.5 125.8 185.0 185.0

Depreciation & amortisation 81.3 95.2 111.4 120.7 132.1 156.9

Associate -5.3 0.0 0.0 0.0 0.0 0.0

Others 56.7 63.3 139.4 0.0 0.0 0.0

Operating CF b/f wc chg 1,447.2 1,489.7 2,167.4 2,128.2 2,739.0 3,539.6

Net change in working capital -19.4 -764.4 -465.2 -662.9 -230.4 -791.5

Net change in provisions 136.5 247.9 109.8 59.7 65.4 71.9

Others -301.0 336.9 -71.9 0.0 0.0 0.0

Operating cash flow 1,263.4 1,310.0 1,740.2 1,525.0 2,573.9 2,820.0

PP&E capex -189.9 -210.3 -406.4 -500.0 -500.0 -500.0

Prepayment for items of PP&E 0.0 0.0 -61.2 0.0 0.0 0.0

Additions to prepaid lease payments -56.1 -93.4 -1.6 0.0 0.0 -50.0

Additions to intangible assets 0.0 -13.7 -7.4 -13.5 -7.4 -7.4

Disposal gains / losses 7.3 3.5 4.5 540.6 5.0 5.0

Decrease (Incr.) in Investments 2.6 2.0 6.4 0.0 0.0 0.0

Decrease (Incr.) in pledged deposits 83.8 -84.4 25.6 0.0 0.0 0.0

Decrease (Incr.) in time deposits -144.9 144.9 -209.0 0.0 0.0 0.0

Others 43.6 0.0 0.0 0.0 0.0 0.0

Investing cash flow -253.5 -251.3 -649.1 27.1 -502.4 -552.4

Dividends paid 0.0 0.0 0.0 -157.5 -220.0 -273.6

Share capital 42.1 81.7 82.9 12.3 1.6 1.6

Net new borrowings -79.0 20.0 14.8 0.0 0.0 0.0

Issue of convertible bonds 672.1 874.4 0.0 1,316.0 0.0 0.0

Contribution/distribution from/to others -519.6 -618.8 53.8 858.7 158.4 158.4

Others -4.6 -1.1 -36.7 -126 -185 -185

Financing cash flow 111.1 356.2 114.9 1,903.8 -244.9 -298.6

Net change in cash 1,120.9 1,414.9 1,206.0 3,455.9 1,826.6 1,969.1

Cash at Start 1,457.9 2,567.5 3,936.8 5,134.3 8,590.2 10,416.8

Adjust: FX & Reconciliation -11.3 -45.6 -8.5 0.0 0.0 0.0

Cash at end 2,567.5 3,936.8 5,134.3 8,590.2 10,416.8 12,385.9

Plus: time deposits 169.9 25.0 234.0 234.0 234.0 234.0

Cash and bank balances 2,737.4 3,961.8 5,368.3 8,824.2 10,650.8 12,619.9


21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 29

Appendix II: Corporate structure Figure 59: Corporate structure upon Alibaba's share subscription on 6 December 2013

Haier Investment and Development

Haier Group

Alibaba SPV


Integrated Channel Services Business

Washing Machine Business

13.2% 2.0%46.7%

Carlyle Asia Partners III AIV Cayman, L.P.

3.8%

Haier Electronics Group Co., Ltd.(1169.HK)

43.4%

Other public shareholders

34.2%

Water Heater Business

Distribution LogisticsAfter-sales

serviceE-commerce

Haier Group Corp.


Figure 60: Corporate structure assuming full conversion of CBs and warrants to Alibaba and Carlyle on 17 Jan 2014

Haier Investment and Development

Haier Group

Alibaba SPV


Integrated Channel Services Business

Washing Machine Business

12.2% 4.3%43.1%

Carlyle Asia Partners III AIV Cayman, L.P.

4.9%

Haier Electronics Group Co., Ltd.(1169.HK)

43.4%

Other public shareholders

35.4%

Water Heater Business

Distribution LogisticsAfter-sales

serviceE-commerce

Haier Group Corp.

Note: The stake of Carlyle was after it placed 100 mn ordinary shares on hand on 17 January 2014 at HK$22.1/share. Carlyle still holds CBs

convertible to 100 mn shares (at HK$10.67 conversion price) and warrants equivalent to 40 mn shares (at HK$11.20 exercise price).

As of 17 January 2014, the company has 2,577.4 mn issued ordinary shares before including the 52.4 mn share subscription by Alibaba and the

conversion of CBs and warrants issued to Carlyle and Alibaba; or 2,840.9 mn on fully diluted basis.


21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 30

Appendix III: Management team Executive directors

Mr. Zhou Yun Jie, Chairman and CEO

Mr. Zhou Yun Jie, aged 46, has been serving as an executive director and general

manager since 12 November 2009. He joined the Haier Group in 1988 and has over 20

years of experience in sales management and enterprise management. Mr. Zhou was

appointed as CEO, and resigned as general manager, on 18 March 2013. He is also a

member of the remuneration committee, nomination committee and strategic committee,

and an alternative president and deputy chairman of the board of Haier Group.

Mr. Zhou graduated from the Huazhong University of Science and Technology with a

Bachelor’s degree in Engineering in 1988. He has a Master’s degree in corporate

management from the Ocean University of China, and has completed his Doctoral courses

with a diploma in Management from the Xian Jiaotong University, the PRC.

Mr. Li Hua Gang

Mr. Li Hua Gang, aged 43, has been a chief operation officer since 12 November 2009,

and has been executive director since 19 April 2010. He joined the Haier Group in 1991

and has since held a number of senior positions in sales and marketing functions with his

expertise in sales management in Tier 3/4 markets of the PRC. Mr. Li graduated from the

Huazhong University of Science and Technology in 1991 with a Bachelor’s degree in

Economics.

Non-executive directors

Mr. Liang Hai Shan

Mr. Liang Hai Shan, aged 46, has been an executive director since December 2001 and

has been re-designated as non-executive director with effect from 12 November 2009. Mr.

Liang was previously responsible for strategic procurement and overall quality control of

products of the Group. He is responsible for identifying market opportunities and white

goods business strategies formulation. He received a Bachelor’s degree of Industry from

the Xian Jiaotong University, and has 24 years of experience in the manufacture of

household electrical appliances, particularly in the raw material procurement function and

white goods business. He is also an executive vice president of Haier Corp, and general

manager and vice chairman of Qingdao Haier Co., Ltd.

Ms. Feng Junyuan, Janine

Ms. Janine Junyuan Feng, aged 44, was appointed a non-executive director on 24 August

2011. She is also a member of the remuneration committee, nomination committee and

strategic committee. Ms. Feng joined the Carlyle Group in 1998; she is a managing

director of the Carlyle Group. 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.

Dr. Wang Han Hua

Dr. Wang Han Hua, aged 49, was appointed non-executive director on 1 June 2013. Dr.

Wang took over as the CEO of Allyes Information Technology (Shanghai) Co. Ltd., an

Internet company providing full digital marketing solutions of data, technology and product

to its customers in December 2012. Prior to this, Dr. Wang had been the president of

Amazon (China) Holding Company Limited from May 2005 until November 2012 and was

responsible for the sale, marketing, cooperation and construction of B2C e-commerce

ecological chain of Amazon in China. Prior to joining Amazon (China) Holding Company

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 31

Limited, Dr. Wang served a number of positions with Motorola Mobility Technologies

(China) Company Limited's Beijing branch between 1998 and 2005 including as marketing

director, director of strategy and corporate planning, vice president of the Asia Pacific

region and general manager of the mobile business. He obtained his Doctor of Philosophy

degree from the University of Nebraska in the United States in 1994.

Ms. Tan Li Xia

Ms. Tan Lixia, aged 43, was appointed non-executive Director with effect from 18

November 2013. She joined Haier Group in 1992 and had held positions as the Head of

Department of Overseas Market Development of Haier Group and Head of Department of

Financial Management of Haier Group. Currently, she is senior vice-president and chief

financial officer of Haier Group. Ms. Tan graduated from the Central University of Finance

and Economics and has a Master's degree in Business Administration from the China

Europe International Business School upon completion of the EMBA programme. She is a

Fellow of the Chartered Institute of Management Accountants and has been designated as

a Chartered Global Management Accountant (CGMA).

Alternative director

Mr. Gui Zhaoyu (alternate to Ms. Feng Junyuan, Janine)

Mr. Gui Zhaoyu, aged 41, was appointed the alternate director to Ms. Janine Junyuan

Feng on 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. Prior to joining the

Carlyle Group, Mr. Gui was vice-president of the investment banking department at China

International Capital Corporation in Beijing, and vice-president at 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 received his MBA degree from the Massachusetts Institute of

Technology's Sloan School of Management.

Senior management

Mr. Xie Ju Zhi

Mr. Xie Ju Zhi, aged 47, graduated from Shandong Economics College in 1989

specialising in Economics and Management. He has held senior positions in the

Electrothermal Product division and East China division of Marketing and Promotion

Division of the Haier Group, and served as the general manager of the Customer Service

Operation Company of the Haier Group since August 2002. He has over ten years of

experience in service management. Currently, he is responsible for the Group’s customer

service and channel business expansion of community stores in the first and second tier

markets.

Mr. Diao Yun Feng

Mr. Diao Yun Feng, aged 41, graduated from the Southeast University in 1995. He joined

the Haier Group in 1995 and has held a number of senior positions including the director

of overseas marketing management of the Haier Group and the general manager of Haier

International Business Corporation Limited. He has experience in managing domestic

small home electric appliances business, and particularly has 18 years of experience in

overseas market expansion and overseas corporate management. He is the director of

small home electric appliances division of the Group, and is responsible for the global

small home electric appliances segment of the integrated channel services business.

Mr. Huang Xiao Wu

Mr. Huang Xiao Wu, aged 35, was appointed deputy general manager in November 2009.

Mr. Huang is responsible for assisting general manager in implementing the Group’s

corporate development strategy. Mr. Huang has 15 years of extensive experience in

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 32

banking, investment and corporate finance. Prior to joining the Group, he had worked with

a commercial bank and several investment banking firms. Mr. Huang holds a Master’s

degree in Business Administration from the University of Hong Kong and a Bachelor’s

degree in Engineering from the University of Chong Qing.

Mr. Peng Jia Jun

Mr. Peng Jia Jun, aged 35, was the former CFO of the company from 10 February 2009 to

1 March 2013. He joined the Haier Group in 2000 and has since held a number of senior

financial positions in Haier Group finance department, Haier Australia trading company

and the washing machine business of the Group. Mr. Peng has a Master’s degree in

Business Administration from the University of International Business and Economics and

a Bachelor’s degree in Business Administration from Northeastern University. He is

currently a Doctoral Candidate in accounting at the Ocean University of China.

Mr. Tao Jun, CFO

Mr. Tao Jun, aged 48, was appointed CFO on 1 March 2013. Prior to joining the Haier

Group, Mr. Tao was executive director of a household electrical appliance company listed

in Hong Kong, financial director of a joint venture owned by a large state-owned company

and a blue chip Hong Kong property company. Mr. Tao has over 20 years of financial

management experience in the retail, distribution and household electrical appliance

business. Mr. Tao also has extensive experience in the merger and acquisitions business

as he has worked in the investment field for over ten years. Mr. Tao has a Master's degree

in Business Administration from the Murdoch University in Australia and a Bachelor's

degree in Economics from the Zhongnan University of Finance and Law.

Mr. Shu Hai

Mr. Shu Hai, aged 46, has served as general manager of the washing machine product

division since June 2009. He joined the Haier Group in 1995 and has since held a number

of senior positions in the washing machine business. He is responsible for the sales,

research and development and production management of the washing machine business

of the Group. Mr. Shu has a Master’s degree in International Trade from the Ocean

University of China.

Mr. Sun Jing Yan

Mr. Sun Jing Yan, aged 42, had served as executive director until August 2011 due to the

reshuffle of management within the Haier Group. He joined the Haier Group in 1993 and

has since held a number of senior positions in the Electrothermal Appliance Department of

the Haier Group. Mr. Sun has over 19 years of extensive experience in water heater

business. He has been the General Manager of the Haier Group’s Electrothermal Product

Division since 2005 and is mainly responsible for the operation of the Group’s water heater

business. Mr. Sun graduated from the Shandong Institute of Light Industry in 1993 with a

Bachelor's in Engineering in Machine Design and Manufacturing.

Mr. Wang Zheng Gang

Mr. WANG Zheng Gang, aged 40, has served as general manager of Qingdao Haier

Logistics Co., Ltd., since March 2003, and is currently the director of the logistics division

of the Group. He has 17 years of experience in the manufacture of household electrical

appliances, particularly in raw material procurement function and logistics business. He is

currently responsible for developing the logistics business of the company and identifying

related market opportunities. Mr. Wang graduated from Tianjin University in 1995, and

Xian Jiaotong University with a Master’s degree in Logistics Engineering in 2007.

Mr. R Xian Cun

Mr. Ren Xian Cun, aged 39, joined the Haier Group in 1997 and has held senior positions

such as general manager of Haier Air-conditioning in the PRC and general manager of

various regional centres of Haier. He has 17 years of experience in market planning and

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 33

marketing management in the home electric appliances industry, and particularly has

professional experience in the operation and management of the home electric appliances

channels. He is director of Haier products of the Group, and is mainly responsible for Haier

products segment of the integrated channel services business. Mr. Ren graduated from

the Jilin Industrial University in 1997, and obtained his Executive Master of Business

Administration (EMBA) from the University of International Business and Economics in

2005.

Company secretary

Mr. Ng Chi Yin

Mr. Ng Chi Yin, aged 47, joined the company on 18 March 2009 as company secretary.

He is a fellow member of the Association of Chartered Certified Accountants, and a

member of the Hong Kong Institute of Certified Public Accountants and the Institute of

Chartered Accountants in England and Wales. He has over 24 years of experience in

auditing, finance and company secretarial matters. Mr. Ng graduated from the Faculty of

Business Administration of the Chinese University of Hong Kong with a Bachelor’s degree

in business administration.

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 34

Companies Mentioned (Price as of 20-Jan-2014)

A O Smith (AOS.N, $52.15) Aucma (600336.SS, Rmb4.87) Changhong (600839.SS, Rmb3.49) Chigo Holding (0449.HK, HK$0.185) Chunlan (600854.SS, Rmb4.03) Deutsche Post DHL (DPWGn.DE, €26.6) FedEx Corporation (FDX.N, $140.51) GOME Electrical Appliances Holding Limited (0493.HK, HK$1.26) GREE (000651.SZ, Rmb29.57) HXDQ (600060.SS, Rmb10.86) Haier (600690.SS, Rmb19.75) Haier Electronics Group Co., Ltd. (1169.HK, HK$22.85, OUTPERFORM, TP HK$30.0) Hefei Sanyo (600983.SS, Rmb13.41) Hisense Kelon (000921.SZ, Rmb10.33) Hisense Kelon (0921.HK, HK$10.58) Home Retail Group (HOME.L, 207.6p) Konka (000016.SZ, Rmb3.69) Little Swan (000418.SZ, Rmb8.67) Macro (000533.SZ, Rmb3.96) Meiling (000521.SZ, Rmb4.51) Midea Group (000333.SZ, Rmb47.51) Noritz (5943.T, ¥2,280) Rinnai (5947.T, ¥8,270) Skyworth Digital (0751.HK, HK$4.08) Suning Appliance (002024.SZ, Rmb9.56) TCL Corp. (000100.SZ, Rmb2.28) TCL Multimedia (1070.HK, HK$3.16) Taiwan Sakura (9911.TW, NT$20.3) The Carlyle Group L.P. (CG.OQ, $35.83) United Parcel Service Inc. (UPS.N, $99.91) Vanward (002543.SZ, Rmb11.5) Vatti (002035.SZ, Rmb10.11) Whirlpool (WHR.N, $156.84)

Disclosure Appendix

Important Global Disclosures

I, Eva Wang, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese rat ings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratin gs are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are , and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its curren t share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 35

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 42% (53% banking clients)

Neutral/Hold* 41% (49% banking clients)

Underperform/Sell* 15% (43% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Haier Electronics Group Co., Ltd. (1169.HK)

Method: Our 12-month target price of HK$30.0 is based on a sum-of-the-parts (SOTP) blended target price-to-earnings (P/E) multiple of 18.9x 2015E earnings per share, which is the weighted average target price-to-earnings (P/E) of the three sub-sectors: 11.5x target 2015E P/E for the washing machine business as the average of washing machine comparable companies, 14.5x target 2015E P/E for the water heater business as the average of water heater comparable companies, and 24.0x target 2015E P/E for the integrated channel services (ICS) business which is set at close to the high-end of logistics companies Fedex and UPS's average forward PE of 18.8x and 25.4x in 2000-2004 (when US E-commerce and related logistics businesses developed fast) because ICS's specialization in large-item goods as well as the value-added services provided create higher entry barriers than in the standard-size parcel business. The target PE is weighted by the expected segment profit contributions of 30.1%, 14.6% and 55.3% of the total, respectively, for the three sub-sectors.

Risk: Risks to our HK$30.0 target price include an economic and/or end market demand slowdown, regulatory policy changes, third-party brand sales growth, possible raw material and/or labor cost hikes, the failure of working capital controls, as well as corporate governance risks from connected party transactions.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (1169.HK, CG.OQ, 1070.HK, HOME.L, WHR.N, UPS.N, FDX.N, DPWGn.DE) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (CG.OQ, WHR.N) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (HOME.L, WHR.N, UPS.N, FDX.N, DPWGn.DE) within the past 12 months

Credit Suisse has managed or co-managed a public offering of securities for the subject company (CG.OQ) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (CG.OQ, WHR.N) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (1169.HK, CG.OQ, 0751.HK, 1070.HK, WHR.N, 0493.HK, UPS.N, FDX.N, DPWGn.DE) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (HOME.L, WHR.N, UPS.N, FDX.N, DPWGn.DE) within the past 12 months

As of the date of this report, Credit Suisse makes a market in the following subject companies (CG.OQ, WHR.N, UPS.N, FDX.N).

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (CG.OQ, HOME.L, DPWGn.DE).

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 36

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (1169.HK, 5947.T, CG.OQ, 0751.HK, 1070.HK, WHR.N, 0493.HK, UPS.N, FDX.N) within the past 12 months

An analyst involved in the preparation of this report has visited certain material operations of the subject company (DPWGn.DE) within the past 12 months

The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: (HOME.L, DPWGn.DE).

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (CG.OQ) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse (Hong Kong) Limited .......................................................................................................................................................... Eva Wang

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

21 January 2014

Haier Electronics

(1169.HK / 1169 HK) 37

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Haier Electronics