Consumer Brands & Retail
Equities – China
June 2015
White goods,
golden opportunity
China: Right time, right place and
the right people
The standard fridges and air conditioners of today will soon become smart appliances in the
smart homes of tomorrow
It’s a re-rating opportunity – the sector valuation is attractive, the government is pushing
industrial innovation, the housing market is perking up and the right management teams
are in place
We initiate coverage with Buys on Gree (TP RMB77.2), Qingdao Haier (TP RMB35.9) and
Midea (TP RMB46.9)
By Lina Yan and Erwan Rambourg
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Consumer Brands & Retail
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June 2015
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Investment summary
The days of dull, standardised white goods are numbered.
The washing machines, fridges, air conditioners and water heaters of
today will soon become the interconnected smart goods in the smart
homes of tomorrow. This means wrenching change for many
manufacturers in China, but we believe this industry, currently unloved
by A-share investors, has great re-rating potential. The government is
pushing industrial innovation, the housing market is starting to perk
up, production costs are falling, and the price wars should come to an
end. The right management teams are in place, too. We initiate
coverage of Midea, Gree and Qingdao Haier with Buy ratings.
Right time, right place and the right people
Zhang Ruimin, the CEO of Haier Group, put it this way. “We used to think: maximise quantity, export
more and manufacture more. This isn’t working. Haier must transform from a traditional manufacturing
enterprise into an internet business.” He said the ultimate aim was for Haier to become a full services
company for the wireless age, where customers place orders for tailor-made appliances, and communicate
directly with their home appliances via smartphone or a controlling device.
Zhang, who turned the company, an almost bankrupt state-owned enterprise, into the world’s second-largest
producer of washing machines, fridges, air conditioners and water heaters, made the comments during an
interview with Reuters published on 13 May 2015. The article also noted that last year Apple announced
that Haier was among the first home appliance makers it was partnering with for its smart home platform.
Zhang’s observations reflect the challenge facing the industry in China – how to turn white goods into smart
goods. Like Haier, the companies we look at in this report are turning their focus to innovation and
connectivity. Gree is the world’s largest air conditioner manufacturer, Qingdao Haier is part of the Haier
Group mentioned above, and Midea is the largest diversified white goods maker in China by revenue.
For some, the smart revolution has already begun. As of the end of 1Q15, Qingdao Haier had four smart
factories and 40 unmanned automatic production lines. Last year, the company sold 1m units of smart
refrigerators, washing machines, air conditioners and water heaters, generating RMB3bn in sales; in
1Q15, the number of smart appliance sales totalled 500,000. Midea started automating its air conditioner
manufacturing process in 2011; since then the number of employees at this unit has fallen from more than
50,000 to 26,000. Both companies have also signed agreements that connect them with international and
domestic online giants (e.g. Apple, smartphone leader Xiaomi and online retailer JD.com).
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Figure 1. Revenue breakdown by segment (2014)
150
0.5%
RMB bn
3%
100
142
7%
140
1%
11%
23%
2%
2%
1%
89
7%
7%
5%
85%
50
51%
20%
17%
1%
7%
28%
23%
0
Midea
Air conditioners
Motors
Income from financial services
Gree
Refrigerators
Logistics/ ICS
Washing machines
Others
QD Haier
Small appliances
Other product sales
Source: Company reports
As we explain later, we feel it’s the right time to invest in this unloved sector – the three stocks are
trading at a 75% discount to the average A-share trailing PE. The industry is in the right place because of
sector consolidation, the government’s determination to upgrade the country’s industrial base, and the
desire of customers to have the best available products. Lastly, we believe the right managements are in
place to oversee this transformation.
Time to buy
China’s white goods industry is hard to ignore. Around 40% of the world’s washing machines and
refrigerators are made in China, and it’s as high as 70% for air conditioners This report takes an in-depth
look at the industry and analyses the performance and prospects of the leading listed A-share companies
to help overseas investors understand a sector, which remains unloved by domestic A-share investors
despite the 12-month bull market in China. In our view, this lack of interest is largely because mainland
retail investors, the driving force behind the A-share rally, much prefer “new economy” stocks in sectors
supported by government policies that are designed to modernise the country’s industrial base. We argue
that white goods companies will rerate as they have the best of both worlds – they are in the process of
joining the “new economy club” and also have more traditional virtues, such a high level of consolidation
that is missing from many other industries in China. The top five have a market share of 68% and the top
three 54%. We believe consolidation will continue, allowing the leaders to improve market share, margins
and returns, as consumers gravitate to better products, leading brands and smart appliances.
Midea, Gree and Qingdao Haier should all benefit from the consolidation process. Of the three, Qingdao
Haier and Midea are moving the fastest in the areas of smart appliances and the Internet of Things (IoT),
as reflected in their premium valuation over Gree. However, we think Gree can catch up quickly, largely
because of improvements brought about by the reform of state-owned-enterprises (SOEs), a process
which is well underway.
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Figure 2. Estimates summary table
(RMBm)
Revenue
Midea
Gree
Qingdao Haier
Reported core net profit
Midea
Gree
Qingdao Haier
Reported core net profit y-o-y %
Midea
Gree
Qingdao Haier
Net margin
Midea
Gree
Qingdao Haier
ROIC
Midea
Gree
Qingdao Haier
2011
2012
2013
2014
2015e
2016e
2017e 2014-17 CAGR
134,128
83,517
73,663
102,713
100,110
79,857
121,265
120,043
86,606
142,311
140,005
88,775
160,011
150,785
93,669
3,473
5,109
2,438
3,027
6,995
3,177
3,903
8,908
3,759
9,477
14,145
4,324
13,395
16,589
5,770
15,350
19,562
6,700
17,890
22,979
7,729
-12.8%
36.9%
30.3%
28.9%
27.3%
18.3%
142.8%
58.8%
15.0%
41.3%
17.3%
33.4%
14.6%
17.9%
16.1%
16.6%
17.5%
15.4%
3.2%
6.3%
3.7%
4.4%
7.4%
4.1%
7.4%
9.1%
4.8%
8.4%
10.1%
5.6%
8.5%
11.0%
6.2%
8.7%
11.6%
6.5%
8.9%
12.2%
6.7%
22.3%
23.6%
20.3%
17.2%
24.3%
18.2%
20.3%
26.1%
16.8%
34.9%
30.4%
14.0%
39.9%
28.2%
14.9%
42.4%
27.9%
15.4%
45.0%
27.4%
15.6%
181,237 205,112
167,984 187,636
103,518 115,541
13.0%
10.3%
9.2%
23.6%
17.6%
21.4%
Source: Company data, HSBC estimates
We now look at our theme of the “Right time, right place and the right people” in more detail.
1. Right time: white goods makers are A-share laggards
White good companies have been laggards in the A-share market over the last 12 months. Gree, Qingdao
Haier and Midea trade at a 16x trailing PE, a large discount to the A-share average of a 66x PE. They on
average returned 111% vs. 125% for the Shanghai index, 160% for the Shenzhen index, and 180% for the
average of all sectors in the A-share markets. We think the relative underperformance is due to a
preference for new economy stocks, as well as a bias towards small caps over large caps. While this gives
white goods companies defensive qualities, we also believe they have the potential to close the valuation
gap with A-share peers in the second half of 2015, driven by:
Figure 3. Relative share performance to Shanghai A index
Figure 4. Relative share performance to Shenzhen A index
160.0%
140.0%
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
-40.0%
May-14
200.0%
150.0%
100.0%
50.0%
0.0%
Jul-14
Qingdao Haier
Source: CEIC
Sep-14
Midea
Nov-14
Jan-15
Gree Electric
Mar-15
-50.0%
May-14
Shanghai SE
Jul-14
Sep-14
Qingdao Haier
Gree Electric
Nov-14
Jan-15
Mar-15
Midea
Shenzhen SE
Source: CEIC
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Figure 5. A-share trailing PE by sectors (27 May 2015)
Figure 6. A-share 12m performance by sectors (27 May 2015)
Shanghai Excg Comp Index
Shenzhen Excg Comp Index
Simple average of sectors
Bank
Gree
Midea
Haier Electronics
Insurance
Auto and auto parts
Public utilities
Property
Energy
Transportation
Diversified financial
Durable goods and services
Food, Beverage and Tabacco
Food and household goods
Consumer services
Telecom services
Pharmacy
Household personal hygiene products
Capital goods
Retail
Commercial and services
Media
Hardware and equipment
Medical equipment
Materials
Softwear and services
Semiconductors
Shanghai Excg Comp Index
Shenzhen Excg Comp Index
Simple average of sectors
Gree
Bank
Household personal hygiene products
Energy
Haier Electronics
Food, Beverage and Tabacco
Midea
Insurance
Pharmacy
Auto and auto parts
Food and household goods
Medical equipment
Media
Commercial and services
Materials
Property
Public utilities
Consumer services
Hardware and equipment
Semiconductors
Durable goods and services
Telecom services
Retail
Transportation
Capital goods
Diversified financial
Softwear and services
23.0
68.1
66.0
13.1
16.3
19.2
33.1
-
50.0
100.0
150.0
200.0
250.0
125%
160%
180%
90%
106%
138%
193%
0% 50% 100% 150% 200% 250% 300% 350% 400%
Source: Wind, Company data
Source: Wind, Company data
 A change in attitude among domestic investors as a result of these companies making progress in
the areas of smart appliances and smart factories. The stocks should rerate as they become regarded
as new economy investments related to the internet and the IoT.
 Greater interest from foreign investors attracted by sustainable improvements in margins and
ROIC as result of industry consolidation.
 The recovery in the property market in 4Q15 should increase investor confidence about earnings
(we are in line with consensus). The government has taken a number of measures to support the
flagging property market this year, including the introduction of looser credit and tax policies. This
has resulted in a pick-up in the number of property transactions and there are signs that prices are
stabilising. With the usual lag of six months between movements in the primary property market and
changes in demand for household appliances, we expect a cyclical recovery in appliance sales from
4Q15. On 4 May 2015, HSBC’s property team issued a report, Eyeing a ‘turbocharged’ recovery, in
which the team upgraded the y-o-y change in ASP forecast in Tier 1,Tier 2 and Tier 3 cities to 10%,
5% and -10% from 0%, 0% and -10%, respectively.
 No more price wars: With demand weak and production costs falling, retailers have been competing
on price. So far this year, the blended average manufacturing costs have fallen 10% for refrigerators,
8% for air conditioners, 7% for washing machines, and 8% for heaters. Some investors fear that price
wars, particularly for air conditioners, and poor demand will offset the decline in raw material prices.
We believe this concern is fading and the improved gross profit margin (GPM) will start to filter
through to earnings. Assuming no changes in product prices, we estimate that every 10% drop in bulk
materials will lead to a 5-6ppt improvement in GPM.
2. Right place: policy support, innovation, richer customers
The white goods industry in China is well past the rapid growth stage and is now quite mature and
consolidated. For the industry leaders, the focus is now on quality, efficiency and technology rather than,
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as Haier Group’s CEO Zhang put it earlier, to “maximise quantity, export more and manufacture more”.
This means the industry is entering a new phase of development.
At the national level, the government this year launched its Made in China 2025 initiative, which is
modelled on Germany’s Industry 4.0 – a reference to the fourth industrial revolution – a programme
launched in 2013. Beijing wants to upgrade the country’s manufacturing sector, led by innovation,
automation and the internet. Reuters described it as part of “a sweeping plan to reinvigorate the country’s
inefficient state-owned enterprises and raise the global competitiveness of domestic industry”. Policy
support is extremely important in China. More details are expected later this year, and they are likely to
include accelerated depreciation schemes and government funding plans. We expect benefits at the
company level as white goods manufacturers raise their game. For example:
 The customer is always right: It’s not just the government that wants better, smarter products. So do
customers. As people get richer, the dull old appliances, which were a status symbol years ago,
simply won’t do any more. At the high end of the market, customers want energy efficiency, stylish
design and the very latest technology, rather than the lowest price. The next step is to understand
what individual customers want so products can be customised. For example, appliances, which are
connected to the internet via Wi-Fi and can be controlled remotely from a computer or mobile device,
are already widely available. A step further is smart grid technology: This involves smart appliances
accessing a smart grid power source to optimise energy use. For example, power will only be
supplied to a coffee maker in the morning and the washing machine at night. Eventually,
refrigerators, toasters, dishwashers and washing machines will all be linked to the smart grid network.
Smart grid technology is already widely used in Germany.
 Domestic companies are closing the gap: Chinese manufacturers usually lag international peers in
terms of technology, so many consumers are willing to pay a premium for an international brand.
The average selling price (ASP) of foreign brands is much higher than for local products – 67% for
washing machines, 64% for water heaters, 102% for fridges, and 13% for air conditioners. However,
the technology gap is closing. The air conditioner industry is leading the way – note the price
difference is only 13%, and in 2011-14 the ASP of international brands declined 3% and those of
domestic brands rose 9%. Other categories of white goods are starting to catch up, too. This process
will be accelerated by the initiatives, such as Made in China 2025.
 Getting smarter: The white goods industry is in the perfect position to benefit from the growth of
smart appliances. Unlike standard appliances, these products allow companies to monitor how
customers use their air conditioners or washing machines. This data gives them a direct link to their
customer base and also enables them to provide value-added services. Gree, Midea and Haier each
have an annual domestic sales volume of around 30m units. This gives them substantial potential
reach in the age of the Internet of Things, given the country has 730m internet users and 302m online
shoppers. Again, this is part of the Made in China 2025 technology upgrade story.
 Changing channels: The white goods industry is undergoing major structural shifts. For example,
production, distribution and services are being digitalised. The physical distribution network is going
to be replaced by the omni-channel – the connection between physical retailers and their customers
through different formats. Customer service will depend on smart appliances and apps. Automated
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production is being embraced, as is building online-to-offline (O2O) platforms. In short, the whole
supply chain is going digital and the business model is moving away from wholesaling to being far
more consumer-driven.
Driven by these trends, especially premiumisation, we expect GPM to continue to trend up. Gree’s GPM
should improve to 35.8% in 2017 from 34.4% in 2015 and Midea’s to 28.1% from 27.1% over the same
period. We forecast Qingdao Haier’s GPM to improve 60-100bp on a like-for-like basis, but GPM overall
will remain stable at 30% due to a change in product mix.
3. Right people: management incentives lower execution risks
Midea (through restructuring) and Qingdao Haier (through the introduction of a strategic investor) have
made progress in aligning the interests of the core management team with minority investors, resolving
conflicts of interests with the parent group and incentivising the management team. Unlike Midea and
Qingdao Haier, Gree has yet to introduce a share option scheme, but we believe this may change, either as
a result of SOE reform or the introduction of a strategic investor. We believe that providing the right
incentives to management will lower execution risks and increase investor returns.
Figure 7. Rank of the three white goods makers on different strategies and execution
Rank
Export
Smart appliances
Online
Smart factories
Management incentives
Number 1
Number 2
Number 3
Qingdao Haier
Qingdao Haier
Qingdao Haier
Qingdao Haier
Midea
Midea
Midea
Midea
Midea
Qingdao Haier
Gree
Gree
Gree
Gree
Gree
Source: HSBC estimates
Ratings
We initiate coverage with Buy ratings on Midea, Gree and Qingdao Haier. They trade at an average 13x
forward PE on 2015e EPS and a 0.8x PEG with ROIC of 15-20%-plus. All have strong earnings visibility,
with dividend payouts of 30-60%-plus. We prefer Gree, followed by Midea and Qingdao Haier. We believe
Gree has the most potential for rerating, given its technology leadership and the potential benefits of SOE
reform. Gree now trades at an 11x PE and a 0.65x PEG, although it has the highest ROIC of the three.
White goods leaders are laggards in the A-share market as large appliance manufacturers are perceived as
old economy stocks. However, we believe the perception will change as they will be at the forefront of
China’s policy of upgrading its industrial base.
Gree, Midea and Qingdao Haier now trade at an 11.6x, 12.1x and 16.3x 2015e PE, respectively, and our
DCF valuation implies a target PE based on 2016e EPS of 11.8x, 12.9x and 16.3x, respectively.
Although the multiples are at the high end of the historical trading ranges, we believe the current PE
valuations are sustainable due to: 1) the valuation discount to A-share peers – their PE valuation discount
to the Shanghai and Shenzhen indexes has widened to 30% and 76%, respectively, from 25% and 70% a
year ago; 2) valuation discount to global peers: despite higher earnings growth, they trade at a 33%
discount to global white goods makers’ average PE of 20x; and 3) cheap PEG: our fair value target prices
imply a 0.8x PEG for Gree, a 0.75x PEG for Midea and a 1x PEG for Qingdao Haier.
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Also, looking forward, we see many catalysts for further re-rating above our target multiples as a result of
favourable government policies (e.g. the Made in China 2025 initiative announced this year), the
improvements in the housing market (it started in 2Q15 and will likely translate into better appliance
demand from 4Q15, with the usual six-month lag), and progress on smart appliances and factories (expect
more products, strategic alliances and innovations to be announced).
It is also useful to look at the valuation of new economy peers. The average trailing PE of software and
services sector is 199x, 123x for medical equipment, and 66x for durable goods and services. To put that
in context, the average trailing PE of the Shanghai index is 23x and 68x for the Shenzhen index.
Midea (000333 CH, Buy, TP RMB46.90)
Strongest growth among peers
We forecast that Midea will deliver a 13% revenue CAGR and a 19.4% profit CAGR in 2014-17e, faster
than the other two companies. This is thanks to a recovery in the growth in market share, a diversified
product portfolio, and profitability gains across segments through economics of scale.
Fast mover to industry 4.0
We believe Midea is the fastest mover in terms of upgrading its technology, as indicated by the strong
contribution from online sales (11% of domestic products sales) and early investments in
production automation.
Best incentivised management team
We believe Midea Group has the best management incentive scheme of the three companies to support
the group’s performance target of above 15% profit growth and above 20% ROE. Management in
aggregate holds more than 9% of Midea Group’s shares through direct equity stakes and share options.
Valuation and risks
Our fair value target price of RMB46.90 is based on DCF. Our DCF assumptions include a 5.5% China
equity risk premium and a 0% terminal growth rate. Midea has a 6% cost of debt and a target 10:90 debtto-equity ratio. Its company-specific beta is 1.00 – yielding a 9.0% cost of equity and, therefore, a cost of
capital of 8.6%. Our fair value target price implies a target PE multiple of 14x on 2015e EPS, 12.9x on
2016e EPS and a 0.74x PEG on a 2014-17e profit CAGR of 19.4%.
Catalysts: better-than-expected GPM; pick-up in white goods sales; major developments in
industrial upgrades.
Key downside risks: faster-than-expected rise in selling expenses due to price wars; slower-thanexpected air conditioner sales due to a cool summer.
Gree (000651 CH, Buy, TP RMB77.20)
Higher earnings visibility
We forecast a 10% revenue CAGR and a 17.5% profit CAGR in 2014-17e. Despite the air conditioner
price war that started in 4Q14, we believe Gree has an ample buffer to deliver on earnings. The company
has shifted strategy, moved away from a high GPM and high selling expenses formula. This means it does
not need to make as many provisions for sales rebates as before, which more than offsets the pressure on
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GPM from lower selling prices. Its balance of sales rebates provisions at the end of 2014 was equal to
more than three years of net profits.
Most leveraged to a cyclical rebound in 2H15
More than 90% of Gree’s earnings come from sales of air conditioners. This segment is volatile because it
is closely linked to the state of the property market cycle and a long lead time for pre-orders, which can
create large build-ups in inventories when demand falls. This is why we believe earnings are more
leveraged than for its peers to a property-driven cyclical recovery from 4Q15.
Potential beneficiary of SOE reform
As a state-owned company (SOE), Gree lags the other two in offering management incentives and
delivering on strategies for e-commerce, smart appliances and industrial upgrades. However, this could
change quickly as Beijing pushes ahead with SOE reform.
Valuation and risks
Our fair value target price of RMB77.20 is based on DCF. Our DCF assumptions include a 5.5% China
equity risk premium and a 0% terminal growth rate. Gree has a 6% cost of debt and a target 10:90
debt-to-equity ratio. Its company-specific beta is 1.00 – yielding a 9.0% cost of equity and, therefore, a
cost of capital of 8.6%. Our fair value target price implies a target PE multiple of 13.8x on 2015e EPS,
11.8x on 2016e EPS and a 0.79x PEG on a 2014-17e profit CAGR of 17.5%.
Catalysts: end of the price war in the air conditioner market; SOE reform; finding a strategic partner.
Key downside risks: inventory issues to persist; raw material price fluctuations; slower-than-expected
SOE reform.
Qingdao Haier (600690 CH, Buy, TP RMB35.90)
Better positioned to benefit from the consumption upgrade
As discussed in the Chapter “White Goods Industry”, consumption upgrade is a key secular industry
driver. From improvements on technology leadership and product offerings, the trend is for domestic
brands to close the pricing gaps with international brands. We believe Qingdao Haier is better positioned
to benefit from this trend with a strong higher end product portfolio, better technology and brand name.
Asset injections from parent to improve profitability
According to an agreement between Qingdao Haier and Haier Group announced in 2011, Haier Group
promised to resolve non-competition issues and reduce connected transactions with Qingdao Haier by
January 2016 (for more details, see the “Group restructuring” section). We think this will help Qingdao
Haier close the profitability gap with the two peers. As we show in the chapter on comparison analysis,
Qingdao Haier has a lower ROIC due to lower net margins.
Leader in industrial upgrades
Qingdao Haier has pushed ahead with digitalising its production, distribution and services. It has
integrated its logistics and distribution under one platform and opened it up to third parties. In 2014, close
to 20% of its revenue was from third-party services income. Haier was also an early mover in the online
business and investing in smart factories. In 2014, 11% of its domestic sales were online and it has
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opened four smart factories, as at the end of 1Q15. We also believe its strategic investor, KKR, will help
speed up the industrial upgrade process.
Valuation and risks
Our fair value target price of RMB35.90 is based on DCF. Our DCF assumptions include a 5.5% China
equity risk premium and a 0% terminal growth rate. Qingdao Haier has a 6% cost of debt and a target
10:90 debt-to-equity ratio. Its company-specific beta is 0.90 – yielding an 8.5% cost of equity and,
therefore, a cost of capital of 8.1%. Our fair value target price implies a target PE multiple of 18.4x on
2015e EPS, 16.3x on 2016e EPS and a 1.17x PEG on a 2014-17 profit CAGR of 15.7%.
Catalysts: better-than-expected GPM; sales recovery in air conditioners; fast growth in the number of
users of its U+ smart appliance systems.
Key downside risks: raw material price fluctuations; faster-than-expected rise in operating costs.
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Contents
Investment summary
1
China’s white goods industry
11
Cyclical rebound in 2H15
23
Looking to the future
29
Peer comparison
41
Midea (000333 CH)
51
Gree (000651 CH)
64
Qingdao Haier (600690 CH)
75
Disclosure appendix
98
Disclaimer
10
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China’s white goods
industry
 We forecast that combined domestic sales of washing machines,
fridges, air conditioners and water heaters will increase at a
CAGR of around 7% in 2014-17
 The industry is quite consolidated, with the top five dominating
the market
 We think the companies will further strengthen their grip on
the market
In this chapter, we examine the secular and cyclical drivers of the white goods industry, and we make our
own forecasts for the industry’s growth rates and outlook. We also assess the degree of industry
consolidation and the drivers for further market share gains by the leaders.
White goods: a mature industry
Secular drivers: penetration, urbanisation and replacement cycle
Growth in large domestic appliances like washing machines, fridges, air conditioners and water heaters is
driven by improving lifestyles and better quality products. In China, the urban market is saturated but
rural areas provide opportunities for growth.
According to the China National Bureau of Statistics, as of 2012, every 100 urban households own an
average of 98 washing machines, 99 fridges, 127 air conditioners and 92 water heaters. Outside the cities
the numbers are 67 washing machines, 67 fridges and 25 air conditioners.
Figure 8. Per 100 household urban penetration of appliances
Figure 9. Per 100 household rural penetration of appliances
150.0
132.9
135.7
137.4
136.0
100.0
122.0
120.0
112.1
95.1
110.0
100.0
90.0
136.0
108.9
94.4
111.8
116.9
115.5
99.2
127.0
130.0
106.8
100.3
96.8
95.0
94.7
93.6
80.0
79.5
80.7
2007
2008
96.9
96.0
95.4
96.6
83.4
84.8
2009
2010
97.1
98.0
97.0
99.0
92.0
Units per 100 Rural Household
Units per 100 Urban Household
140.0
120.0
137.8
80.0
60.0
45.9
70.0
53.1
57.3
45.2
67.2
62.6
67.3
61.5
37.1
40.0
26.1
20.0
88.9
49.1
8.5
30.2
25.4
22.6
9.8
12.2
16.0
-
Washing Machine
Source: CEIC
Fridge
Air Conditioner
2011
TV
2012
Water Heater
2007
Washing Machine
2008
2009
Fridge
2010
Air Conditioner
2011
2012
TV
Source: CEIC
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Urbanisation is another crucial factor. According to the government, the urbanisation rate will be 60% by
2020, up from 54.8% in 2014. This will involve an estimated 100m people migrating to urban areas, an
average of more than 13m per annum. This will drive up demand for white goods appliances as the new
arrivals pursue a lifestyle similar to their urban peers.
The product replacement cycle reflects the desire to upgrade. With rising income, replacing old
appliances with the latest, more energy efficient-products is a natural development. Replacement demand
will account for a large chunk of total demand. For example, we estimate that in 2014 about 49% of
demand for washing machines came from replacement demand; it was 63% for refrigerators and 44.8%
for air conditioners.
Figure 10. The replacement demand as a percentage of total domestic demand, by volume
80.0%
67.3%
70.0%
60.0%
55.1%
50.0%
44.2%
63.1%
54.4%
53.9%
49.1%
44.8%
37.3%
40.0%
30.0%
20.0%
10.0%
0.0%
Washer
Fridge
2012
2013
Air conditioner
2014
Source: Industry Online, HSBC estimates
Cyclical drivers
The property market cycle usually leads demand for new home-related appliances by six months.
First, we look at the most recent cycle. China’s government introduced measures to cool the property
market from 3Q10, which lasted until the end of 2012. Once the tightening cycle was over, new
residential home sales grew 17.7% y-o-y by area and 25.2% y-o-y in value in 2013. During this period
growth in appliance sales by the Top 100 retailers (according to the Ministry of Commerce) rose to 13.7%
in 2013 from only 3% in 2012.
Second, we look at the current cycle. The property market cooled again in 2014 as the central bank
tightened liquidity. As a result, new residential home sales declined by 9.4% y-o-y by area and 8.2% y-oy in value last year. In line with the property cycle, appliances sales decelerated from 1.9% in 1H14 to a
negative 5% in 2H14, and a negative 6% in 1Q15.
The property market has now entered another loosening cycle. To prevent the economy sliding into a
deflation, in November 2014 the central bank lowered interest rates and started to pump liquidity into the
credit market in November-December 2014. On 30 March 2015, several major new policies were
announced to stimulate the property market. In the current cycle, we expect demand for appliances to
recover in 4Q15, driven by the pick-up in the property market.
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In Figure 11-12, we illustrate the correlation between residential property sales and the growth in
appliances sales with a lag of six months. The decline in residential property sales started to slow at the
end of 2014, indicating a pick-up in appliance sales growth from 4Q15.
Figure 11. Appliances volume with a six-month lag vs.
residential property volume y-o-y growth
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
Figure 12. Appliances volume with a six-month lag vs.
residential property volume
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
2,500
140
120
2,000
100
80
1,500
60
1,000
40
500
20
0
Residentia l Property YoY Gwth
Heater YoY Gwth 6 month lag - RHS
Fridge YoY Gwth 6 month lag - RHS
AC YoY Gwth 6 month lag - RHS
Washer YoY Gwth 6 month lag - RHS
Source: CEIC, CMM
0
Residentia l Property (sqm mn)
Heater 6 month lag (Units)-RHS
AC 6 month lag (Unit s)-RHS
Washer 6 month lag (Units)-RHS
Fridge 6 month lag (Units)-RHS
Source: CEIC, CMM
Domestic demand volume forecasts
Based on urbanisation, penetration growth and replacement demand, Figure 13-14 shows our forecasts for
domestic demand for white goods in volume terms. Note that the high penetration rate of air conditioners
in urban areas is the result of households installing more than one unit.
Figure 13. White goods domestic demand, by volume demand drivers
2008a
2009a
2010a
2011a
2012a
2013a
2014a
2015e
2016e
2017e
71.4
94.7
49.1
61.2
93.6
30.2
54.0
100.3
9.8
74.2
96.0
53.1
65.7
95.4
37.1
58.7
106.8
12.2
76.2
96.9
57.3
69.7
96.6
45.2
61.7
112.1
16.0
79.7
97.1
62.6
79.1
97.0
61.5
71.9
122.0
22.6
82.5
98.0
67.2
83.1
99.0
67.3
75.9
127.0
25.4
81.9
99
72
83.2
100
74
85.6
133
28
85.3
100
77
86.9
100
81
92.4
140
32
88.2
100
82
90.8
100
90
99.7
147
36
91.2
100
88
94.9
100
99
107.5
154
40
94.3
100
94
96.3
100
100
115.8
162
45
80.7
1,328
83.4
1,335
0.5%
645
689
48.3%
1.4%
396,436
223,225
173,211
3.4
2.9
4.0
84.8
1,341
0.5%
670
671
49.9%
1.6%
402,469
232,563
169,906
3.3
2.9
4.0
88.9
1,347
0.5%
691
657
51.3%
1.3%
409,042
240,693
168,349
3.3
2.9
3.9
92.0
1,354
0.5%
712
642
52.6%
1.3%
414,409
248,888
165,521
3.3
2.86
3.88
95
1,361
0.5%
731
630
53.7%
1.2%
452,298
255,633
163,086
3.0
2.86
3.86
98
1,368
0.5%
749
619
54.8%
1.0%
452,299
261,944
161,055
3.0
2.86
3.84
100
1,375
0.5%
767
608
55.8%
1.0%
452,300
268,060
159,077
3.0
2.86
3.82
100
1,382
0.5%
784
597
56.8%
1.0%
452,301
274,231
157,043
3.1
2.86
3.80
100
1,388
0.5%
802
586
57.8%
1.0%
452,302
280,457
154,952
3.1
2.86
3.78
Per 100 household ownership (units)
Washing machines
- Urban
- Rural
Fridges
- Urban
- Rural
Air conditioners
- Urban
- Rural
Water heaters
- Urban
Population (in million)
y-o-y %
- Urban
- Rural
- Urbanisation rate
y-o-y changes
# of households (in thousand)
- Urban
- Rural
# of people per household
- Urban
- Rural
624
704
47.0%
390,002
214,443
175,559
3.4
2.9
4.0
Source: CEIC, Industry Online, HSBC estimates
We forecast that domestic demand volumes will increase at a CAGR of 4.2% for washing machines, 4.0%
for fridges, 6.3% for air conditioners, and 4.1% for water heaters in 2014-17. The key assumptions are
listed in Figure 13.
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As illustrated in Figure 15, the white goods sector grew rapidly in 2009-11 thanks to favourable policy
measures and then went through an adjustment period in 2012-14 as those polices came to an end and the
property market cycle changed.
There is little doubt that the white goods industry is maturing in terms of volume growth. We expect
refrigerators to have relatively slower growth due to high levels of ownership.
Refrigerator sales benefited the most from the “Go Rural” subsidy programme, which ran between
December 2007 and February 2013. Domestic sales volumes grew 50% y-o-y in 2009 and 30% y-o-y in
2010 (according to IOL data). In rural areas 67 of every 100 households owned a fridge in 2012, up from
30 in 2008; in the same year 99% of urban households owned a fridge.
Figure 14. Domestic white goods appliances demand, by volume
('000 units)
Washing machines
- Total domestic consumption
y-o-y %
- New demand
y-o-y %
- Replacement demand
y-o-y %
Replacement demand as % of total
Fridges
- Total domestic consumption
y-o-y %
- New demand
y-o-y %
- Replacement demand
y-o-y %
Replacement demand as % of total
Air conditioners
- Total domestic consumption
y-o-y %
- New demand
y-o-y %
- Replacement demand
y-o-y %
Replacement demand as % of total
Water heaters
- Total domestic consumption
y-o-y %
- Other demand
y-o-y %
- Replacement demand in urban
y-o-y %
Replacement demand as % of total
2008a
2009a
2010a
2011a
2012a
2013a
2014a
2015e
2016e
2017e
23,800
26,463
11.2%
16,047
203.2%
10,416
-43.7%
39.4%
33,977
28.4%
19,612
22.2%
14,364
37.9%
42.3%
36,360
7.0%
17,719
-9.7%
18,641
29.8%
51.3%
34,813
-4.3%
15,631
-11.8%
19,182
2.9%
55.1%
37,690
8.3%
21,023
34.5%
16,667
-13.1%
44.2%
38,528
2.2%
19,620
-6.7%
18,909
13.5%
49.1%
40,154
4.2%
20,601
5.0%
19,554
3.4%
48.7%
41,848
4.2%
21,631
5.0%
20,218
3.4%
48.3%
43,613
4.2%
22,712
5.0%
20,901
3.4%
47.9%
39,295
50.7%
22,667
108.9%
16,627
9.2%
42.3%
50,965
29.7%
32,877
45.0%
18,088
8.8%
35.5%
59,008
15.8%
29,548
-10.1%
29,460
62.9%
49.9%
55,818
-5.4%
18,246
-38.3%
37,572
27.5%
67.3%
55,893
0.1%
25,781
41.3%
30,112
-19.9%
53.9%
52,978
-5.2%
19,561
-24.1%
33,417
11.0%
63.1%
55,440
4.6%
20,539
5.0%
34,901
4.4%
63.0%
58,033
4.7%
21,566
5.0%
36,467
4.5%
62.8%
59,654
2.8%
22,644
5.0%
37,010
1.5%
62.0%
37,417
26.2%
27,809
36.6%
9,608
3.4%
25.7%
51,503
37.6%
37,400
34.5%
14,103
46.8%
27.4%
60,614
17.7%
45,524
21.7%
15,090
7.0%
24.9%
57,249
-5.6%
26,097
-42.7%
31,152
106.4%
54.4%
62,352
8.9%
39,119
49.9%
23,233
-25.4%
37.3%
70,010
12.3%
38,660
-1.2%
31,350
34.9%
44.8%
74,401
6.3%
40,593
5.0%
33,808
7.8%
45.4%
79,072
6.3%
42,622
5.0%
36,450
7.8%
46.1%
84,042
6.3%
44,754
5.0%
39,288
7.8%
46.7%
23,900
25,013
4.7%
13,564
27,532
10.1%
18,085
33.3%
9,447
-17.5%
34.3%
25,865
-6.1%
14,871
-17.8%
10,994
16.4%
42.5%
27,112
4.8%
15,317
3.0%
11,795
7.3%
43.5%
28,117
3.7%
15,777
3.0%
12,340
4.6%
43.9%
29,151
3.7%
16,250
3.0%
12,901
4.5%
44.3%
5,292
18,508
77.8%
26,076
10,849
15,227
58.4%
29,647
20,355
9,291
31.3%
11,449
45.8%
Source: Consumption data from Industry Online, HSBC estimates
Although sales of air conditioners also benefited from the government subsidies, there is still room for
growth, especially in rural areas. If we assume two air conditioners per household, urban penetration
should reach 200 per every 100 households; this suggests 57% growth from 127 in 2012. In rural areas,
the penetration rate of air conditioners was only 25% in 2012, the lowest in the white goods segment.
For washing machines, the penetration rates in both urban and rural markets are similar to those for
refrigerators (see Figure 13). As washing machines replace manual labour and are a significant
convenience, we believe that as lifestyles improve in rural areas, the penetration rate will increase
significantly from 67% in 2012 in the next three years.
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For water heaters, we have less data – an urban penetration rate of 92% in 2012 – but we believe
improving lifestyles will drive growth, especially in rural areas.
Figure 15. CAGR for domestic appliances (domestic demand volume)
30.0%
27.3%
25.0%
20.0%
22.5%
17.2%
15.0%
10.6%
10.0%
6.3%
5.2%
4.2%
5.0%
4.0%
4.1%
1.7%
0.0%
-2.6%
-5.0%
CAGR 2009-2011
CAGR 2012-2014
Washer
Fridge
CAGR 2014-2017
Air conditioner
Water Heater
Source: HSBC estimates
The rural growth driver
We believe lower tier cities and rural areas will be the battle ground for white goods manufacturers,
distributors and retailers. The leaders are all focusing on strengthening their distribution networks.
Haier has a sales network of more than 30,000 specialty stores covered by 8,000 Haier Specialty Store
franchisees and over 1,000 Goodaymart Specialty Store franchisees at the county level. Gree has
increased the number of its specialty stores from 15,000 in 2013 to more than 20,000 today. Midea has
15,000 specialty stores at the end of 2014 (10,000 for large appliances, 5,000 for small appliances) and it
is also building out O2O flagship stores through its distributors. The number of Midea flagship stores
grew to 1,900 in 2014 from 300 in 2013 and the target is to reach 4,000 in 2016.
Consumption upgrade drives ASP growth
As the industry matures, upgrades should drive ASP growth as consumers trade up to more sophisticated
products.
Figure 16. Domestic white goods sales ASP
_________ Refrigerator sales __________ ________ Air conditioner sales _________ _______ Washing machine sales ________
2011
2012
2013
2014
2011
2012
2013
2014
2011
2012
2013
2014
Annual ASP
y-o-y growth %
2,834
2,894
2.1%
3,057
5.6%
3,174
3.8%
3,430
3,589
4.6%
3,681
2.6%
3,658
-0.6%
2,003
2,062
2.9%
2,165
5.0%
2,258
4.3%
Source: CMM
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Refrigerators
Consumers are buying larger fridges. Sales of three-door, multiple-door and other higher end refrigerators
are growing faster than single- and double-door products. Low-end products represented 46% of total
sales in 2014, down from 60% in 2011. In terms of value, the contribution from products with an ASP
above RMB3,000 increased to 65% in 2014 from 51% in 2011.
Figure 17. Domestic fridge volume breakdown by product type
Figure 18. Domestic fridge sales value breakdown by
ASP (RMB)
100%
100%
7.3%
90%
80%
1.9%
9.5%
2.5%
4.4%
10.8%
8.3%
90%
80%
30.9%
70%
7.9%
33.8%
35.4%
60%
50%
50%
40%
40%
57.2%
30%
53.4%
48.9%
20%
10%
2011
Single Door
2012
Double doors
2013
Three
30%
44.6%
1.8%
2.4%
2.8%
0%
13.4%
17.1%
22.2%
22.1%
20.5%
32.1%
30.9%
25.7%
17.0%
17.0%
16.7%
2011
2012
2013
16.0%
24.2%
22.1%
24.4%
19.3%
20%
1.4%
10%
Bi-fold door
Source: CMM
16.1%
0%
2014
Multi-Door
14.6%
16.7%
70%
34.9%
60%
12.1%
below RMB2k
2k-3k
2014
3k-5k
5k-9k
above 9k
Source: CMM
In 2001-14, the ASP of domestic refrigerators went up by 12% to RMB3,174. In our forecast period of
2015-17, we expect the ASP to go up by 2% per annum.
Air conditioners
Energy-efficient products are gaining market share. For example, the sales volume of air conditioners
with variable frequency compressors increased to 57% in 2014 from 48% in 2011. These products have a
higher ASP, so in value terms sales from product with an ASP above RMB3,000 increased to 71% in
2014, up from 63% in 2011. The overall domestic air conditioner sales ASP went up by 6.7% to
RMB3,658 during the same period. In our forecast period of 2015-17, we expect the ASP to go up by 2%
per annum.
Figure 19. Air conditioners, volume breakdown by product
Figure 20. Air conditioner sales value breakdown by ASP (RMB)
100%
100%
90%
80%
51.9%
47.6%
47.1%
42.7%
80%
70%
60%
16.14%
17.37%
19.15%
24.37%
25.29%
26.16%
25.07%
25.47%
27.12%
26.47%
33.90%
31.09%
29.35%
29.31%
3.52%
2011
2.02%
2012
0.00%
2013
0.00%
2014
60%
50%
40%
20%
14.65%
23.55%
40%
48.1%
52.4%
52.9%
57.3%
30%
20%
10%
0%
2011
2012
Frequency conversion
Source: CMM
2013
2014
Fixed frequency
0%
Below 2k
2k-3k
3k-5k
5k-7k
above 7k
Source: CMM
Washing machines
Roller-type machines (front-loading) are considered faster and more efficient as they consume less water
than top-loading appliances. Market share by volume of roller-type washing machines has increased from
24.7% in 2011 to 32.1% in 2014. They are more expensive and, as a result, the sales value contribution
from products with an ASP above RMB3,000 increased to 49% in 2014 from 37% in 2011.
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Figure 21. Washing machine volume, by product type
Figure 22. Washing machine sales, by ASP (RMB)
100%
100%
90%
24.7%
25.9%
90%
29.9%
80%
32.1%
70%
70%
60%
60%
50%
58.7%
40%
57.6%
20%
20%
15.5%
1.2%
2011
14.3%
1.0%
2012
Single Cylinder
21.1%
21.9%
Double Cylinder
11.7% 0.7%
2013
9.8%
38.2%
40%
57.4%
30%
0%
17.9%
20.5%
23.8%
23.5%
24.9%
50%
58.7%
30%
10%
15.9%
80%
10%
0.7%
36.1%
32.3%
24.7%
23.7%
19.9%
19.0%
2011
2012
2013
2014
0%
2014
Pulsator
36.5%
below 1500
Roller
Source: CMM
1500 - 3000
3000-4500
4500 +
Source: CMM
During the same period, the ASP of domestic refrigerators went up 13% to RMB2,258. In our forecast
period of 2015-17, we expect the ASP to go up by 3% per annum.
Growth outlook
In 2014-17, based on our assumptions on ASP and volume growth, we forecast that domestic sales will
increase at a CAGR of 7.3% for washing machines, 6.1% for refrigerators, 8.4% for air conditioners, and
7.2% for water heaters. We also expect more growth from rural areas, due to a lower penetration.
Figure 23. Domestic white goods sales value forecasts
_______ Volume ('000 units) * ________ _____________ ASP (RMB) _____________ ____________ Domestic sales (RMBbn) ___________
2014
2015e
2016e
2017e
2014
2015e
2016e
2017e
2014
2015e
2016e
2017e
CAGR
Washing machines
y-o-y %
Fridges
y-o-y %
Air conditioners
y-o-y %
Water heaters
y-o-y %
38,528
2.2%
52,978
-5.2%
70,010
12.3%
25,865
-6.1%
40,154
4.2%
55,440
4.6%
74,401
6.3%
27,112
4.8%
41,848
4.2%
58,033
4.7%
79,072
6.3%
28,117
3.7%
43,613
4.2%
59,654
2.8%
84,042
6.3%
29,151
3.7%
2,258
4.3%
3,174
3.8%
3,658
-0.6%
1,888
4.4%
2,326
3.0%
3,237
2.0%
3,731
2.0%
1,944
3.0%
2,396
3.0%
3,302
2.0%
3,806
2.0%
2,003
3.0%
2,468
3.0%
3,368
2.0%
3,882
2.0%
2,063
3.0%
87.0
6.6%
168.2
-1.6%
256.1
11.6%
48.8
-2.0%
93.4
7.3%
179.5
6.7%
277.6
8.4%
52.7
8.0%
100.3
7.3%
191.6
6.8%
300.9
8.4%
56.3
6.8%
107.6
7.3%
200.9
4.8%
326.2
8.4%
60.1
6.8%
7.3%
6.1%
8.4%
7.2%
Source: Industry data, HSBC estimates. Note: *Volume is based on sell-in volume
White good industry consolidation – leaders dominate all
We use data from China Market Monitor (CMM) to analyse the market concentration of the white goods
industry. Overall, the whole industry is highly consolidated, with the top three having a 47-61% market
share, depending on the product, and the top five having a 65-71% market share.
Figure 24. White goods industry concentration by volume (2014)
80%
70%
60%
50%
40%
30%
20%
10%
0%
71.7%
68.0%
60.6%
55.5%
51.8%
24.8%
Air Conditioner
Top 1
68.8%
64.7%
46.9%
26.7%
23.6%
17.2%
Fridge
Heater
Top 3
Washer
Top 5
Source: CMM
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Refrigerators
In value terms the market share of the top three fridge manufacturers fell slightly between 2011 and 2014,
from 55.3% to 52.7%; for the top five, it dropped from 72.2% to 71.2%. By volume, the fall was more
apparent – from 54.6% to 51.8% for the top three and from 71.3% to 67.9% for the top five. This reflects
rising competition from smaller companies offering lower priced products, as well as new companies that
entered the market in 2009-11 to take advantage of government subsidies. That said, the industry
consolidation remains at a high level.
Figure 25. Market concentration of refrigerator industry
by volume
80%
71.5% 71.0% 69.5%
70%
60%
51.5%
54.6% 52.8%
Figure 26. Market concentration of refrigerator industry
by value
80%
68.0%
60%
51.8%
51.4%
55.3% 54.3% 52.7%
50%
50%
40%
40%
30%
70.2% 72.2% 72.6% 71.2%
70%
24.1%
28.1%
25.2% 23.6%
30%
26.7%
29.9%
27.1% 26.0%
20%
20%
10%
10%
0%
0%
Top 1
Top 3
2011
2012
Top 1
Top 5
2013
Top 3
2011
2014
Source: CMM
2012
Top 5
2013
2014
Source: CMM
The top three by sales value are Haier, Hisense Kelon and Siemens. The leader, Haier, has almost double
the market share of its nearest rival, Hisense Kelon. Figure 27 shows that Haier lost market share over
2011-14; however, this might be due to bias in CMM data. CMM focuses on third-party rather than
manufacturers’ internal channels. During this period Haier shifted more sales to its internal channels (70%
of its total sales in 2014) and this may explain the decline in market share.
29.9%
26.0%
30%
27.1%
35%
26.7%
Figure 27. Top 5 refrigerator manufactures’ market share by value (2011-14)
7.9%
7.5%
7.7%
8.6%
8.8%
7.7%
9.9%
10%
6.9%
12.6%
12.5%
13.3%
12.4%
14.1%
15%
14.5%
11.0%
20%
13.0%
25%
5%
0%
Haier
2011
Hisense Kelon series
(Rongsheng)
2012
Siemens
Midea series
2013
Meiling
2014
Source: CMM
Air conditioners
The market concentration by volume has grown steadily between 2011 and 2014 – the top three have
gone from 69% to 72% and the top five from 57% to 61%. In value terms, the top three have gone from
59% to 65% and the top five from 70% to 75%.
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Figure 28. Market concentration of air conditioner industry
by volume
80%
Figure 29. Market concentration of air conditioner industry
by value
60%
50%
50%
40%
30%
62.8% 64.9%
59.2% 61.6%
70%
60.6%
57.4% 59.1% 58.9%
60%
73.0% 74.9%
69.9% 71.7%
80%
69.0% 70.3% 69.5% 71.7%
70%
40%
23.9% 25.8% 25.3% 24.8%
30%
20%
26.1% 28.8% 28.3% 28.0%
20%
10%
10%
0%
0%
Top 1
Top 3
2011
2012
Top 5
2013
Top 1
2014
Top 3
2011
Source: CMM
2012
Top 5
2013
2014
Source: CMM
The top three are Gree, Midea and Haier, with Gree and Midea having more than a 52% market share
between them. Figure 30 shows that between 2012 and 2014, Gree maintain its lead with a 28% share by
value. Midea rose from 20% in 2012 to 25% in 2014 as a result of restructuring its sales channels. Haier’s
market share is shown to be stable at 13%; however, again, this could be due to bias in CMM data.
Haier’s air conditioner sales rose at an 18% of CAGR in 2011-14, outpacing the industry average.
4.2%
4.4%
4.0%
5.0%
4.5%
5.0%
4.0%
5.2%
10.0%
4.8%
12.3%
13.0%
15.0%
12.9%
24.7%
10.7%
20.0%
21.6%
22.5%
25.0%
19.7%
28.0%
30.0%
28.8%
26.1%
35.0%
28.3%
Figure 30. Top 5 air conditioner manufactures’ market share by value (2011-14)
0.0%
Gree
Midea
Haier
2011
Mitsubishi Electric
2012
Oaks
2013
2014
Source: CMM
Washing machines
The market concentration by value declined in 2011-14 – from 60% to 59% for the top three and from
78% to 74% for the top five. It was a similar story by volume (see table), largely because Haier’s market
share fell (see Figure 33). Over this period Haier’s washing machine sales increased at a CAGR of 7.7%,
in line with the industry growth, so we think CMM’s methodology explains the apparent contradiction.
Figure 31. Market concentration of washing machine
industry, by volume
75.0% 73.2%
70.4% 68.8%
80%
70%
60.8% 59.8%
60%
56.9% 55.5%
90%
78.2% 77.9%
74.8% 73.7%
80%
70%
57.9% 59.3% 56.7% 58.5%
60%
50%
50%
40%
30%
Figure 32. Market concentration of washing machine
industry, by value
27.0%
31.2%
40%
27.9% 26.7%
30%
20%
10%
29.9% 26.8%
26.2%
10%
0%
0%
Top 1
2011
Source: CMM
26.3%
20%
Top 3
2012
Top 5
2013
2014
Top 1
2011
Top 3
2012
Top 5
2013
2014
Source: CMM
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By sales value, the top three are Haier, Midea and Siemens. Haier, the leader, has roughly double the
market share of Siemens, the No 3. Figure 33 shows that between 2012 and 2014, Siemens has
consistently picked up market share and other foreign brands, like Panasonic and Sanyo, have lost share.
9.2%
7.4%
8.8%
9.1%
8.9%
10.0%
7.9%
9.8%
11.2%
13.8%
13.2%
15.0%
12.1%
11.2%
18.4%
20.0%
16.7%
20.4%
25.0%
17.2%
26.2%
30.0%
29.9%
26.3%
35.0%
26.8%
Figure 33. Top 5 washing machine manufactures’ market shares by value (2011-14)
5.0%
0.0%
Haier
Midea
2011
Siemens
Panasonic
2012
Sanyo
2013
2014
Source: CMM
Water heaters
As shown in the tables, the market share of the leading companies is steadily increasing in both volume
and value. With the top three having more than 50% of the market, competition in the water heater
industry remains benign.
Figure 34. Market concentration of water heater industry,
by volume
70%
63.6%
63.6%
60%
45.9%
45.3%
46.9%
64.2%
49.9%
50%
40%
20%
70%
60%
50%
30%
64.7%
Figure 35. Market concentration of water heater industry,
by value
50.3%
65.2%
65.7%
51.1%
40%
19.9%
30%
18.2%
17.2%
20%
10%
0%
16.9%
15.3%
0%
Top 1
2012
Source: CMM
18.2%
10%
Top 3
2013
Top 5
Top 1
2014
2012
Top 3
2013
Top 5
2014
Source: CMM
By sales, the top three are AO Smith, a US company, Haier and Midea. The leader, AO Smith, has more
than double the market share of the No 3. Figure 36 shows that between 2012 and 2014, Midea regained
market share through channel restructuring. Although CMM data show Haier losing market share, in
2011-14 its water heater sales rose at a 17% CAGR, outpacing the industry.
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7.2%
7.0%
6.8%
7.4%
7.8%
7.5%
10.0%
8.5%
7.6%
15.0%
10.8%
15.3%
20.0%
16.9%
24.9%
18.2%
25.0%
25.0%
30.0%
24.1%
Figure 36. Top 5 water heater manufactures’ market share, by value (2011-14)
5.0%
0.0%
A.O. Smith
Haier
2012
Midea
2013
Wangjiale
Wanhe
2014
Source: CMM
Government polices
Since 2008, the government had used various subsidy programmes to boost domestic consumption. As a
result, the white goods industry recorded strong growth in 2009-11. Growth was negative in 2012 after
the subsidies ended, and then recovered in 2013 due to a new subsidy on energy-efficient appliances and
the recovery in the housing market. The energy-efficient subsidy expired in June 2013.
Plan to encourage upgrades
In January 2015, the country’s main planning agency, the National Development and Reform
Commission (NDRC), announced a plan to encourage China’s industry to be more environmentally
friendly and energy efficient. For white goods, this should boost sales of air conditioners, refrigerators,
and washing machines that meet the highest level of energy efficiency, known as level one. Details of this
latest subsidy are not available yet; however, energy grade 1 products account for about 5% of total
appliance sales (including categories like flat screen TVs). We think this “industry leader” programme
will drive further industry consolidation as the energy grade 1 products are dominated by market leaders.
Figure 37. Government subsidies for the home appliance industry
Exchange old for new subsidy programme
Implementation period
Trial cities/provinces
Go Rural
Implementation period
Trial cities/provinces
-Initial trial period starting 1 June 2009 to 31 May 2010
-Extended to the whole country from June 2010 to expire 31 December 2011
Cities (5x): Beijing, Shanghai, Tianjin, Changsha, Fuzhou; Provinces (4x): Guangdong, Shandong, Zhejiang, Jiangsu
-Initial trial period starting December 2007 to December 2008 in three provinces
-Extended from 3 to 12 provinces from December 2008 for a period of four years
-It later was extended to the whole country from February 2009
-Expired in November 2011 for the first three trial provinces; November 2012 for the second batch nine trial provinces; February 2013 for the
rest of the country
First batch trial provinces/cities (3x) Shandong, Henan, Sichuan; second batch trial (9x) in Inner Mongolia, Liaoning, Heilongjiang, Anhui, Hubei,
Hunan, Guangxi, Chongqing, Shanxi
Energy saving subsidy
Implementation period
-Started in June 2009 to expired in June 2011
-Adjusted in June 2010 by an increase in the energy saving threshold and reducing the subsidy
Phase II Energy saving flat-panel TV and air conditioner subsidy
Implementation period
-The policy will last from 1 June 2012 to 31 May 2013 to give subsidies on energy saving flat panel TVs and air conditioners
Source: HSBC collected from the NDRC website
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Conclusion
The white goods industry in China has past the fast growth stage and the market is highly consolidated.
Over 2014-17, based on our assumptions on ASPs and volume growth, we forecast that domestic sales
will increase at a CAGR of 7.3% for washing machines, 6.1% for refrigerators, 8.4% for air conditioners
and 7.2% for water heaters.
As the market is so concentrated, we expect the margins and ROIC of the leading manufacturers to
continue to improve. Haier’s net margin should rise from 5.6% in 2014 to 6.7% in 2017e, Midea’s from
10.1% to 12.2%, and Gree’s from 8.4% to 8.9%.
As the industry matures, the focus will increasingly turn from quantity to quality, giving companies with
strong R&D a significant advantage. As profitability becomes a higher priority than scale, margins should
improve through efficiency gains and product upgrades. We expect occasional price wars to strengthen
the leaders’ market share and help clear out channel inventories. At the same time, the industry
consolidation will continue as the dominant companies strengthen their distribution channels in lower tier
cities and rural areas, while benefitting from energy-efficient programmes and ever-more aspirational
consumers seeking the best products.
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Cyclical rebound in 2H15
 Declining raw material prices are a major tailwind; the benefits for
air conditioner makers will come more in 2H15 after the price war
 Competition for refrigerators and washing machines remains
benign; the benefit of lower raw material prices to flow to the
bottom line
 We expect industry growth to recover from 4Q15, led by the pick-
up in the property cycle
In this chapter we look at the outlook for 2015 by assessing cyclical factors, such as air conditioner price
wars, raw material prices and the property cycle.
2015: raw material price benefits outweigh weak demand
Air conditioner price wars
The distribution of air conditioners is different to other types of white goods. Each August, distributors
make pre-payments for the inventory they are ordering, a lead time of about 12 months. In May, they
have a chance to replenish their orders right before the peak season. If market conditions change, the
industry can experience destocking and restocking cycles due to the mismatch between actual sales
and pre-orders.
In 2014, inventories piled up due to a sluggish property market and a cold summer. According to the
“2015 China Air Conditioner Industry White Paper” by CMM, inventory reached more than 40m units by
the end of 2014, equivalent to one year of sales volume at the retail level.
We do not have the data to track the inventory level at a retail level, so we use the inventory-to-sales ratio at
the manufacturers’ factories. This ratio went up to 1.12x in 4Q14 from an average of 0.73x in 9M14 and
0.72x in 2013. With working capital tight because of slower-than-expected retail sales, distributors did not
buy from factories in quantities based on their pre-orders, causing inventories at the factory level to rise too.
To clear stock, Gree started a price war in September 2014 and peers, such as Midea and Haier, followed;
another price war by major air conditioners makers followed in March. According to Ao Wei
Consultancy, the ASP declined by 9% y-o-y during the latest price war. To protect the health of the whole
industry, the government intervened. On 30 April, the NDRC called for a meeting with the major
manufacturer and distributors to ask them to avoid excessive price wars and stabilise prices in the coming
peak sales season.
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So, despite a difficult start to 2015, we expect to see the following:
 As the industry margin bottomed out in 1Q15, the downward pressure on the ASP is falling prior to
the peak summer season; the benefit from declining raw material prices will start to flow through.
 The usual order replenishment prior to the peak season in May will be limited due to the inventory issue.
 Manufacturers’ sell-in volumes will start to improve from 3Q15 from the recovery in housing market
and improving inventories, especially if there is a hot summer.
 Market consolidation will increase after the price war.
Figure 38. Air conditioner inventory at manufacturers (’0000 units)
2.5
'0000 units
1400
1200
2.0
1000
1.5
800
1.0
600
400
0.5
200
0
Inventory at manufacturers (rhs)
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
0.0
Inventory to sales ratio
Source: IOL
Raw material prices
The materials most commonly used to make white goods are steel, aluminium, copper and plastics. Price
fluctuations, which are driven by international supply and demand, have a large impact on gross profit
margin (GPM), as retail prices are usually stable. Raw materials account for about 80% of the cost of
goods sold (COGS), and the appliances have a GPM of 25-35%. Assuming there is no change in product
prices, every 10% drop in raw material prices leads to a 5-6ppt improvement in GPM. As Figure 39
shows, YTD the blended average cost for making refrigerators, air conditioners, washing machines and
water heaters has declined by 10%, 8%, 7% and 8%, respectively.
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Figure 39. Raw material composition by products and the price y-o-y % changes
As % of 1H13a 2H13a 2013a 1H14a 2H14a 2014a 1H15e
raw
materials
Fridges:
- Copper
- Steel
- Plastics
- Aluminium
Air conditioners:
- Steel
Cold roll steel
Zinc coat steel
Stainless steel
Silicon steel
Hot roll steel
Iron + steel casts
- Copper
- Plastics
- Aluminium
Washing machines:
- Steel
Cold roll steel
Zinc coat steel
Stainless steel
- ABS
- Polypropylene (PP)
Kitchen ware
- Stainless steel
- Copper
- Aluminium
2.1% 3.1% 2.5% -1.0%
-4.9% -9.2% -7.1% -10.7%
-3.7% 1.1% -1.3% 1.6%
14.5% 14.8% 14.7% 1.8%
-7.9% -7.0% -7.5% -9.8%
-1.5% -1.9% -1.7% -3.8%
23% -6.3% -4.9% -5.6% -5.4%
2% -8.6% -2.7% -5.8% -8.1%
6% -3.4% -7.8% -5.6% -6.9%
5% -13.2% -14.0% -13.6% -3.4%
4% -0.8% 2.6% 0.8% -7.5%
3% -10.0% -4.9% -7.6% -8.9%
4% -3.7% 1.1% -1.3% 1.6%
20% -4.9% -9.2% -7.1% -10.7%
10% 14.5% 14.8% 14.7% 1.8%
6% -7.9% -7.0% -7.5% -9.8%
-2.6% -2.0% -2.3% -1.2%
25% -11.2% -9.9% -10.6% -5.1%
-2.9%
-5.2%
-1.9%
-4.4%
-3.3%
-2.4%
-3.0%
-9.7%
-0.8%
6.5%
-9.4%
-9.4%
-1.9%
-5.2%
-4.4%
-3.3%
-0.1%
0.8%
8% -8.6% -2.7% -5.8% -8.1%
1% -3.4% -7.8% -5.6% -6.9%
15% -13.2% -14.0% -13.6% -3.4%
10% -3.1% -1.6% -2.4% -4.1%
11% 4.8% 5.4% 5.1% 4.6%
-10.5% -11.6% -11.1% -6.1%
60% -13.2% -14.0% -13.6% -3.4%
20% -4.9% -9.2% -7.1% -10.7%
20% -7.9% -7.0% -7.5% -9.8%
-9.7%
-0.8%
6.5%
-4.0%
1.1%
2.2%
6.5%
-5.2%
-3.3%
15%
31%
30%
5%
-2.0%
-8.0%
-0.2%
-1.4%
-6.5%
-3.4%
-5.6%
-8.9%
-3.9%
1.4%
-8.4%
-9.2%
-0.2%
-8.0%
-1.4%
-6.5%
-2.7%
10.6%
-8.9%
-3.9%
1.4%
-4.1%
2.8%
-2.1%
1.4%
-8.0%
-6.5%
1Q13a
2Q13a 3Q13a 4Q13a 1Q14a 2Q14a 3Q14a 4Q14a 1Q15a 2Q15e
-10.5%
3.0%
1.1% 4.8% 1.4% -1.3%
-12.9% -2.8% -7.1% -8.6% -9.9% -13.7%
-8.5% -2.1% -5.4% 2.2% 0.1% 0.7%
-19.3% 14.9% 14.0% 19.3% 10.6% 3.3%
-1.9% -7.5% -8.4% -7.5% -6.5% -10.3%
-7.5% -0.7% -2.2% -1.3% -2.5% -4.9%
-12.7% -5.1% -7.4% -4.7% -5.1% -8.1%
-14.9% -8.1% -9.1% -2.2% -3.2% -8.6%
-15.4% -1.1% -5.6% -8.8% -6.8% -7.7%
-8.5% -11.6% -14.7% -14.8% -13.1% -14.8%
-11.9% -2.8%
1.2% 3.6% 1.5% -6.3%
-17.9% -7.2% -12.8% -3.0% -6.8% -11.6%
-8.5% -2.1% -5.4% 2.2% 0.1% 0.7%
-12.9% -2.8% -7.1% -8.6% -9.9% -13.7%
-19.3% 14.9% 14.0% 19.3% 10.6% 3.3%
-1.9% -7.5% -8.4% -7.5% -6.5% -10.3%
-7.3% -1.9% -3.3% -2.0% -2.0% -3.6%
-11.0% -10.0% -12.4% -10.3% -9.5% -12.4%
-0.7%
-7.4%
2.5%
0.4%
-9.3%
-2.6%
-2.5%
-7.5%
-6.2%
8.7%
-8.8%
-6.1%
2.5%
-7.4%
0.4%
-9.3%
1.3%
2.6%
-1.7%
-2.6%
-1.0%
-3.0%
-1.6%
-1.3%
-1.5%
-8.8%
0.6%
9.3%
-8.2%
-8.0%
-1.0%
-2.6%
-3.0%
-1.6%
1.3%
2.9%
-4.0% -12.1%
-7.8% -14.2%
-2.7% -8.7%
-5.9% -23.7%
-4.9% -2.8%
-3.5% -7.7%
-4.5% -10.2%
-10.5% -14.6%
-2.1% -13.7%
3.7% 1.1%
-10.5% -12.0%
-11.0% -16.9%
-2.7% -8.7%
-7.8% -14.2%
-5.9% -23.7%
-4.9% -2.8%
-1.5% -6.1%
-1.3% -4.8%
-7.1%
-10.4%
-10.2%
-7.7%
0.0%
-6.8%
-17.2%
-17.4%
-20.3%
-17.9%
-14.8%
-21.2%
-10.2%
-10.4%
-7.7%
0.0%
-8.0%
-17.9%
-14.9% -8.1% -9.1% -2.2% -3.2% -8.6%
-15.4% -1.1% -5.6% -8.8% -6.8% -7.7%
-8.5% -11.6% -14.7% -14.8% -13.1% -14.8%
-18.9% -2.6% -3.8% -0.7% -2.4% -6.8%
-24.2%
8.1%
1.4% 5.5% 5.3% 1.8%
-8.1% -9.0% -11.9% -12.1% -11.2% -13.7%
-8.5% -11.6% -14.7% -14.8% -13.1% -14.8%
-12.9% -2.8% -7.1% -8.6% -9.9% -13.7%
-1.9% -7.5% -8.4% -7.5% -6.5% -10.3%
-7.5%
-6.2%
8.7%
-1.3%
7.4%
1.9%
8.7%
-7.4%
-9.3%
-8.8%
0.6%
9.3%
-1.1%
6.7%
4.8%
9.3%
-2.6%
-1.6%
-10.5% -14.6%
-2.1% -13.7%
3.7% 1.1%
-7.0% -19.2%
-4.4% -27.1%
-0.3% -2.7%
3.7% 1.1%
-7.8% -14.2%
-4.9% -2.8%
-17.4%
-20.3%
-17.9%
-17.6%
-15.9%
-12.9%
-17.9%
-10.4%
0.0%
Source: Thomson Reuters Datastream
Refrigerators
Refrigerators are made up of several basic components: the exterior cabinet body, the door, the inner
cabinet, the insulation inserted between the two, the cooling system, the refrigerant and the fixtures.
Based on our estimates and assuming the components represent up to 80% of COGS, the raw material
costs for a refrigerator break down like this – 31% steel, 30% plastics, 15% copper and 5% aluminium.
Figure 40. Refrigerator: % of raw materials
Aluminum, 5%
Steel, 31%
Plastics, 30%
Copper, 15%
Source: HSBC estimates
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June 2015
Air conditioners
According to our estimates, the breakdown for a typical air conditioner is about 23% steel (cold roll steel,
zinc coat steel, stainless steel, silicon steel, hot roll steel and iron or steel casts), 20% copper, 10% plastic
and 6% aluminium.
Figure 41. Air conditioner: % of raw materials
Aluminum, 6%
Plastics, 10%
Steel, 23%
Copper, 20%
Source: HSBC estimates
Washing machines
Washing machines include 25% steel, 11% polypropylene (PP) and 10% Acrylonitrile butadiene styrene
(ABS), two types of plastics.
Figure 42. Washing machines: % of raw materials
Poly propylene (PP), 11%
Steel, 25%
Acry lonitrile butadiene
sty rene (ABS), 10%
Source: HSBC estimates
Sensitivity of GPM to raw material prices
In 2014, raw materials accounted for 78% of total COGS for Midea, 74% for Gree, and 63% for Qingdao
Haier. Overall GPM in 2014 was 25.5% for Midea, 36.6% for Gree, and 27.5% for Qingdao Haier.
It’s clear that movements in raw material prices have a large impact on margins when the ASP is stable.
Based on our estimates, assuming there are no changes in product prices, for every 10% drop in bulk
materials, gross profit margin should improve by 5-6ppt.
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Figure 43. Raw material price y-o-y growth %
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
1-Apr-13
1-Jul-13
1-Oct-13
1-Jan-14
1-Apr-14
Aluminium
Copper
1-Jul-14
1-Oct-14
Steel
ABS
1-Jan-15
1-Apr-15
Source: Thomson Reuters Datastream
Property cycle
As discussed earlier, the property market cycle usually leads the demand for new home-related appliances
by six months, the average time between buying a property and moving in. Residential floor space sold in
December 2014 was down only 3% y-o-y, a pick-up from the declines of 20% and 15% in July 2014 and
August 2014, respectively. In March 2015, the decline in volume narrowed to only 1%.
In the same month the government issued the most powerful loosening measures of the last seven years,
called “3.30 new policies”. According to Barron’s.com, up to 27 April 2015, housing transaction volumes
in April went up by 26% y-o-y; in first and second tier cities volumes rose 61% and 17% y-o-y,
respectively, and the ASP was up 5%.
In Figure 43-48, we illustrate the correlation between the residential property sales and the sales of
refrigerators, air conditioners and washing machines, with a six-month lag. While the recovery in the
housing market started at the end of 2014, we believe growth in demand for home appliances will resume
in 4Q15.
Figure 44a. Refrigerator volumes with a six-month lag vs.
residential property volume y-o-y growth
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
50%
140
1,600
40%
120
1,400
30%
20%
10%
0%
Residential Property YoY Gwth
Source: CEIC, CMM
Figure 44b. Refrigerator volumes with a six-month lag vs.
residential property volume
1,200
100
1,000
80
800
60
-10%
40
-20%
20
-30%
0
Fridge YoY Gwth 6 month lag - RHS
600
400
200
0
Residential Property (sqm mn)
Fridge 6 month lag (Units)-RHS
Source: CEIC, CMM
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Figure 45. Air conditioner volumes with a six-month lag vs.
residential property volume y-o-y growth
Figure 46. Air conditioner volumes with a six-month lag vs.
residential property volume
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
50%
140
40%
120
30%
20%
2,000
100
10%
80
1,500
0%
60
1,000
-10%
-20%
Residential Property YoY Gwth
2,500
40
-30%
20
-40%
0
AC YoY Gwth 6 month lag - RHS
500
0
Residentia l Property (sqm mn)
AC 6 month lag (Units)-RHS
Source: CEIC, CMM
Source: CEIC, CMM
Figure 47. Washing machine volumes with a six-month lag
vs. residential property volume y-o-y growth
Figure 48. Washing machine volumes with a six-month lag
vs. residential property volume
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
20%
140
1,600
15%
120
1,400
10%
5%
0%
-5%
Residentia l Property YoY Gwth
1,000
80
800
60
-10%
40
-15%
20
-20%
0
Washer YoY Gwth 6 month lag - RHS
Source: CEIC, CMM
1,200
100
600
400
200
0
Residentia l Property (sqm mn)
Was her 6 month lag (Units)-RHS
Source: CEIC, CMM
Outlook for 2015
Air conditioners
We see 1Q15 as the bottom as price wars depress the ASP and margins but clear inventories. As we enter
the peak summer season, we believe the promotions will start to disappear and the benefits from declining
raw material prices will filter through to the bottom line. The recovery in the property market from
beginning of the year should also help sales from 4Q15. We expect earnings momentum to improve
materially in 2H15 from 1H15.
Refrigerators and washing machines
Competition remains benign. The benefit from lower raw material process can flow to the bottom line or
help boost sales through increasing investments in distribution channels.
Water heaters
The sluggish property market hurt water heater sales, so we expect a recovery from 4Q15. Growth will
likely be driven by product upgrades and new product launches.
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Looking to the future
 New trends and company strategies, including exports, smart
appliances, online, smart factories and incentives
 Qingdao Haier leads in smart appliances, followed by Midea; Gree
has ground to make up
 Automation the potential game-changer
In this chapter, we review the new trends that are shaping the future landscape of the white goods industry.
China’s white goods makers are developing their brands overseas to boost growth. Domestically, they are
developing smart appliances, growing online channels, and investing in smart factories.
Exports
As the domestic market becomes more mature, exports are becoming an important part of the strategy by
white goods makers in China to globalise their brands. China is already the largest manufacturer and
exporter of electronic appliances. We estimate that China accounts for more than 40% of global capacity
for colour TVs, washing machines and refrigerators, and at least 70% when it comes to air conditioners.
IOL data show that in 2014 31% of the fridges made in China were exported, as were 33% of washing
machines and 40% of air conditioners. Last year exports accounted for 38% of Midea’s sales, 12% of
Qingdao Haier’s sales and 11% of Gree’s sales.
Figure 49. The breakdown of total sales volume (2014)
Figure 50. The y-o-y % growth of white goods export volume
100%
60%
50%
40%
80%
60%
67%
69%
60%
30%
20%
10%
40%
0%
-10%
20%
40%
33%
31%
-20%
-30%
0%
Washers
Air conditioners
Export
Source: IOL
Refridgerator
2006
2007
2008
2009
2010
2011
Fridges export Yoy%
Air conditioners export Yoy%
2012
2013
2014
Washers export Yoy%
Domestic
Source: IOL
While exports are obviously important, the companies use different strategies. To export your own brand,
you need an overseas sales network or good partnerships in foreign markets. This is more difficult than
the production-driven original equipment manufacturer (OEM) model. In general, the large companies in
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China are switching from OEM to exporting their own brands and the original design model (ODM). In
Figure 51, we compare the export strategies of Midea, Qingdao Haier and Gree.
Figure 51. Comparison of white goods makers’ export strategies
Company Strategies
Qingdao
Haier
Own brand/ODM only
 First stage: focus on its own brand only and
developed markets, like Europe, the US and
Japan in export
 Second stage: target to acquire second tier
international brands to expand market share
Midea
Try to increase the share of own brand/ODM
 First stage: export mainly under OEM to grow its
share in the export market
 Second stage: invest in international brands and
form strategic alliances overseas
 Third stage: target to export under its own brand
or ODM under its own control
Details
 Haier does not do OEM exports and its Haier brand is the
number one brand globally for washing machines with a 14.4%
share by volume
% of export under its own
brands/ODM
100%
 It started to develop its high end products’ global share under its
own Casarte brand, and acquired brands, like Sanyo and Fisher
& Paykel;
 Globally, Haier has 21 industry parks, 24 manufacturing factories,
10 R&D centres and 19 overseas trading companies.
 Global production: in 2007, Midea started its first overseas
production base in Vietnam
 Global sales & distribution: 1) 2008: Midea and Carrier set up a
JV to develop overseas markets; 2) 2010: acquired a 32.5%
stake in Carrier's business in Egypt and Morocco; 3) 2011:
acquired 50% stake in Carrier's businesses in Latin American
countries of Brazil, Argentina and Chile; 4) 2012: Midea set up a
JV in India with Carrier and holds a 60% stake
More than 60% of export sales
under its own Midea brand or
ODM in 2014 (38% under Midea
own brands; 22% under ODM)
 Tie-up with Bosch in the European market: on 31 March 2015,
Midea signed a JV contract with Bosch to manufacture VRF
central air conditioning systems in Hefei and export these to
Europe
Gree
Try to increase the share of own brand/ODM
 First stage: export under OEM model to gain
market share and focus on emerging markets
 Second stage: export more under ODM and its
own brand and focus on developed markets
 Global production: Gree started its first overseas production in
Brazil in 2001
 Global sales & distribution: Gree set up its US sales office in
2012
 In 2014, Gree has a 20% market share by volume in the air
conditioner export market, based on IOL data
50% in 2014, up from 30% in
2012 of export volume is under
its own brands (exports under its
own brands to 100 countries and
regions globally)
Source: Company disclosures, HSBC
Conclusion
Qingdao Hair and Midea have the highest proportion of export sales either through their own brand or the
ODM model. This gives the companies better control over their sales overseas, disregarding fluctuations
in exchanges rates, economic cycles overseas and tariff changes.
Smart appliances
White good makers in China are developing smart appliances and smart systems to connect directly with
consumers and complete the digitalisation process that links research, production and sales. Smart
appliances will be the main driver of the replacement cycle of appliances by stimulating upgrade demand.
Definitions differ, but smart appliances generally refer to products that use computer systems and
communications technology to make functions faster, cheaper, more energy efficient and more convenient.
Appliances that are connected to the internet via Wi-Fi and can be controlled remotely from a computer
or mobile device are already widely available in many markets. A step further is smart grid technology:
This involves smart appliances accessing a smart grid power source to optimise energy use. For example,
power will only be supplied to a coffee maker in the morning and the washing machine at night.
Eventually, we believe refrigerators, toasters, dishwashers and washing machines will all be linked to the
smart grid network. Smart grid technology is already widely used in Germany.
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We think white goods leaders have natural advantages when it comes to developing new ecosystems for
smart appliances, part of the Internet of Things (IoT). For example, they can choose whether to develop
their own smart platforms or work with major online companies. Gree, Midea and Haier all have an
annual domestic sales volume of around 30m units. This gives them a significant head start in terms of
customer reach, especially for smart appliances.
Figure 52. Annual domestic sales volume (m, 2014)
Air conditioners
Refrigerators
Washing machines
Total
Gree
Midea
Haier
30.3
16.8
8.0
4.7
29.4
6.8
15.1
12.9
34.9
30.3
Source: HSBC estimates
c
Strategies in China
We review the smart appliances strategies of Qingdao Haier, Midea and Gree, as well as those of pure
internet companies like Xiaomi and JD.com.
Qingdao Haier
In 2014, Qingdao Haier started commercial sales of internet/smart appliances. It sold 1m units of smart
refrigerators, washing, air conditioners and water heaters, generating RMB3bn of sales under its U-home
smart appliance system. In 1Q15 alone the company sold half a million smart appliances.
Qingdao Haier has a two-pronged approach. One is developing its own smart products – at the end of last
year the company had 25 categories. The other is to attract more suppliers and users to form its own smart
ecosystem – it has the most open smart appliance platforms that are available to third-party brands and
industry partners via its 7 Smart Life Ecosystem, part of the company’s U+ Platform.
The plan is to open the U+ Platform to more appliance brands, product categories and services providers
to provide consumers with a “safe, convenient, comfortable and pleasing” lifestyle anytime and anywhere.
The goal is total connectivity between devices through communications, internet, TV broadcasting, and
power grid networks at a family, community and global level. The elements that make up this connected
world include U+Smart family, U+Cloud, U+Big data, U+APP and U+Cloud.
We believe Qingdao Haier is leading the way in China in the area of open smart systems. By the end of
last year it had attracted nearly 100 partners and, significantly, Qingdao Haier was among the first home
appliance makers globally to partner with Apple’s smart home platform.
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Figure 53. Qingdao Haier’s smart appliances, modules and partners
Smart Air Ecosystem
Smart Food Ecosystem
Smart Wash Ecosystem
Smart Safety Ecosystem
Smart Health Ecosystem
Smart Entertainment
Ecosystem
Smart Water Ecosystem
Key modules
Strategic partners
Use air conditioners, air boxes, air rubic cubes, mini-air
conditioners, purifiers as the hardware terminals and “Haier Good
Air” “Air Box” and ”Air Steward” APPs as the user terminals to
provide users with value-added services to improve air quality
Use smart refrigerators as the hardware terminals and “Haier
Fridge” “Weizhidao Gourmet” and “U-Cellar+” APPs as the user
terminals to provide users with value-added services to improve
food quality
Smart refrigerator products include Smart Window series, Smart
Control Four-door series, and Casarte Smart series
Based on its database on clothes, water quality, detergent and
customer washing habits, through smart washing machines to build an
open platform for perfect washing solutions. Smart washing machines
provide automatic cloth detection, automatic washing programme
selection, and automatic release of detergents
The platform is open to apparel brands, detergent brands
It aims to provide users with functions, such as personal safety
(emergency alarm, fall alarm, missing alarm, abnormal sleep
alarm, abnormal health alarm, hijack alarm) and family safety
(fire, water, electricity and gas alarm) and community safety and
monitoring
Use U+ Health Cloud to provide functions sports, diet, health,
environment, chronic disease management functions
Co-operate with Alibaba on smart TV
Apple: Joined Apple’s HomeKit smart
appliance platform in March2015
Device connectivity: GE, Honeywell,
Panasonic, Emerson, Samsung, Toshiba
Data connectivity: Benlaishenghuo Net,
COFCO, HNA Group, Yihaodian, BAIDU, Sino
Ocean Land, Meishi Tianxia, Baixianji, ROHM,
3M,Excegroup, Wanda Group
Cross-field supplier connectivity: P&G,
Unilever, DCT, Greenland, Yuexiu Property,
Neusoft, Mitsubishi, State Grid, CRC,
Greentown, Evergrande, Fosun Group,
FreescaleQualcomm, Baosteel, Intel Peer
connectivity: Bohe, Beita, Chunyu, Yuzhiyi,
Judong Kangye
Content connectivity: Xiami Music, Bosheng,
Orvibo, Iqiyi, Alibaba, Realtek, Optoma,
Integrate water heaters, fans, water purifiers, water heaters based Huawei, Tianqian kalaok
on “Haier Smart Washer”, “Haier Heat Control” “Smart Heater”
APPs to realise real-time data interaction and automatic
monitoring of water heaters
Source: Company reports
Midea
Midea has a different approach to smart appliances than Qingdao Haier. Rather than starting with
developing an open system, Midea has chosen to develop individual smart appliances. The idea is that, at
a later stage, it can either develop an integrated smart home system or connect its smart appliances to
other platforms or networks. In March 2014, Midea published its M-Smart report, highlighting 25
categories of smart appliances. The aim is to have more than 50% of air conditioner sales classified as
“smart” by 2018.
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Figure 54. Midea’s smart appliances, modules and partners
Air smart housekeeper
Nutrient smart
housekeeper
Water smart house
keeper
Safety smart house
keeper
Key modules
Strategic partner
Midea's air conditioners, air purifiers, humidifiers and dehumidifiers
to provide “one-stop” air quality solutions on air temperature,
humidity, cleanness, etc.
Smart air conditioners have functions like voice control, sleep mode,
remote control, electricity usage management, and information alerts
Xiaomi: In December 2014, Midea offered 55m
new shares at RMB23.01 to Xiaomi. Xiaomi will
have a 1.288% stake in Midea and it has also
signed a strategic agreement to co-operate in the
smart home value chain and e-commerce
It provides integrated control of all kitchen appliances through its
cloud platform using Wi-Fi and IGRS protocols
Apple: On 18 March 2015, Midea joined
Smart small appliances with functions like auto detection, auto alerts; Apple’s HomeKit smart home platform
smart microwaves with auto cooking based on QR code scanning,
remote control, smart menu downloads
Alibaba: On 3 April 2015, Midea signed an
Smart washing machines with functions to auto detect load and
agreement with Alibaba to co-operate in
decide the volume of detergent
marketing, system connectivity, smart appliances,
supply chain warehousing, product customisation
SIIX: On 3 April 2015, Midea signed a JV
Smart range tops with auto gas leakage alerts, auto switch-off, kid
agreement with SIIX EMS to jointly develop
lock, timed cooking, firewall
smart switch controls
Other partners: JD, Huawei, Qualcomm,
Neusoft, TI, Broadcom, Marvell, LeTV. SRRC,
CHEARI, HKUST
Source: Company reports
Midea’s smart appliance products and strategic partners are shown in Figure 54. Midea’s plan is to
provide integrated smart home solutions that cover air quality, nutrient, water quality and safety. The
strategy is to: 1) start by developing individual smart appliance products; and 2) through remote control,
big data and sensor technology, produce appliances that are intelligent, healthy and energy efficient under
three matrixes – One Housekeeper, One Community and One Centre. One Housekeeper released 25
categories of smart appliances in 2014; One Community has built up a 10m consumer strong Media
Consumer Society and will improve marketing through social media; One Centre upgrade all smart
appliances through M-BOX.
At a later stage, Midea will start to build its own ecosystem and integrated solutions based on its cloud
platform, APP development and Wi-Fi modules. In 2015, it plans to increase the number of smart product
categories to 30 and develop B2B business under Smart Hotels.
Gree
Gree has a distinctive strategy, probably because it focuses on a single product: air conditioners. Gree
focuses on developing a smart power management solution that allows a family to transmit surplus
electricity generated by Gree photovoltaic air conditioners to the city grid. The device also allows
customers to monitor energy use to choose the most economical option. Gree’s smart strategies are based
on one control platform, a smart power management centre and big data.
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Figure 55. Gree’s smart appliances, modules
Smart power system
Smart air conditioners
Smart phones
Other smart devices
Based on multi-line photovoltaics air conditioner system, a family can have its own electricity supply and can also
transmit surplus electricity to the city grid. The device also allows each family to monitor the energy
generation/usage status anytime to choose the most economical power usage solutions
Use air conditioners as the central hubs/power source to connect to other appliances
Gree will launch its own smart phones in 2015 as the user terminals for using its smart appliances
Water heaters, water purifiers, smart remote control terminals
Source: Company reports
Pure internet companies: Xiaomi and JD.com
We also examine the smart appliance strategies of pure internet companies. Domestic smartphone giant
Xiaomi and online retailer JD.com (JD US, Not Rated) are the two most active in developing the Internet
of Things/appliances through their own smart ecosystems.
Xiaomi
A pure internet-based smart phone manufacture in China under the brand “Xiaomi”: as Xiaomi does not
manufacture appliances, its general principal is to create an open smart ecosystem to attract more users,
suppliers, services and third-party technologies, and to co-operate with other manufacturers to develop the
hardware. Xiaomi’s strategies are:
 To use the Xiaomi smartphone as a control centre to connect with Xiaomi Cloud, the MIUI system
and app through Xiaomi’s low-cost smart module.
 To connect its smart phone users with the smart appliance users to interact with them on multiple
hardware interfaces.
Figure 56. Xiaomi smart modules
Universal Smart Module
Xiaomi Smart Home App
Universal Smart Hardware Cloud
Key modules
Strategic partner
Based on Wi-Fi/Communication Protocol with Xiaomi
Cloud, upgrade traditional devices to smart appliances
Connect devices so that every family member can
control all appliances. Also, connect devices with ecommerce and apps so that the customer can place
orders easily. Deeply integrated with the MIUI
system so the users can connect/control every
device with just one click
Provide network and cloud services to
manufacturers to enable them to store, calculate,
and access their user data
Midea: offered 55m common shares at RMB23.01 per
share to Xiaomi. Xiaomi will have own 1.29% of the
common shares of Midea after the transaction. The two
parties also formed a strategic cooperation alliance to
develop smart home systems and e-commerce
Source: Company announcements
JD.com
In March 2015, JD.com announced it was developing a Smart Home Combo Kit with Broadlink. In the
same month it also established a JV with IFLY TECK (002230 CH, Not Rated) to cooperate on smart
home business and speech recognition. It wants to build a network of appliances that can control devices
automatically and conveniently. The company develops its own smart chips so appliances can be
upgraded to smart devices. The smart chips are based on Wi-Fi chip technology, mobile connection and
virtual networking.
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Figure 57. JD.com smart modules
Key modules
Strategic Partner
Smart Home Combo Kit
Kitchen, bedroom, dining appliances
JD App
All the products can be controlled through
the JD app; connects 300 kinds of devices
and will reach 1,000 soon
JD Smart Cloud system partners include: Changdi, TCL, Joyoung,
Tupo, Povos, Haier, Lightmates, A.O.Smith, Pcpop, Fotile, Dooya,
Hisense, Kelon, Gongniu, Dr.Drinks, Sense-U, Chigo, Mfresh,
Phillps, Galanz, Supor, Qinyuan, Lifesense, Yuyue
Source: Company announcements
E-commerce strategies
The shift from offline to online is accelerating. Qingdao Haier, Gree, and Midea are adapting their
business models to the new dynamics in consumer behaviour by flattening the organisational structure,
digitalising their channels and investing in smart factories.
Figure 58. Y-o-Y Value Growth
Figure 59. Y-o-Y Volume Growth
170%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
64%
67%
75%
Flat panel Air con Fridge Washer
TV
Yoy % 2014/2013
Source: MIIT
170%
80%
Water Air purifer
heater
166%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
67%
70%
74%
85%
Flat panel Air con Fridge Washer
TV
Yoy % 2014/2013
78%
Water
heater
Air
purifier
Source: MIIT
In 2014, online consumer electronics (CE) sales grew 51% y-o-y to RMB201bn. The contribution to
online CE sales from large appliances grew to 30% of the total in 2H14, up from 26% in 1H13. Online
sales of large appliances, small appliances and mobile handsets grew 72%, 78% and 40% y-o-y,
respectively, in 2014. By category, online sales of water heaters, washing machines, refrigerators, air
conditioners and flat panel TVs grew 170%, 170%, 75%, 67% and 64%, respectively, last year.
By value, online consumer electronics purchases now represent 13% of total sales. The online volume
penetration of flat panel TVs, washing machines, refrigerators, air conditioners and water heaters reached
21%, 14%, 13%, 11% and 10%, respectively, in 2H14.
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Figure 60. Breakdown of online CE sales by value (1H13)
Figure 61. Breakdown of online CE sales by value (2H14)
- Big
appliances
26%
- Mobile
handsets
57%
- Small
appliances
17%
Source: MIIT
- Big
appliances
30%
- Mobile
handsets
58%
- Small
appliances
12%
Source: MIIT
Online scale
We compare the three companies in terms of online scale, categories and strategies. In Figure 63, we
compare the online contribution to their respective domestic large and small appliances sales by adjusting
the retail online Gross Merchandise Volume (GMV) to ex-factory revenue. This shows that in 2014
online accounted for 11% of Qingdao Haier and Midea’s sales but only 1% of Gree’s sales.
Figure 62. Online sales by categories (2014)
Retail GMV (RMBm)
Large appliances
Small appliances
Total
Market share by value (%)
Large appliances
Small appliances
Total
Qingdao Haier
Midea
Gree
Market
5,540
1,562
7,102
6,000
4,000
10,000
1,000
1,000
9.4%
5.0%
3.5%
10.2%
12.9%
5.0%
1.7%
0.0%
0.5%
59,100
31,000
201,100
Total 3
21.2%
17.9%
9.0%
Source: MIIT, Company data, HSBC estimates
In Figure 62, we compare the three’s market shares by category. Qinghao Haier and Midea had roughly
the same market share of 10% for online large appliance sales. Qingdao Haier and Midea’s market share
in small appliances, including water heaters, was 5% and 13%, respectively.
The market concentration for large appliances is much lower online than offline. The top three’s market
share is above 50%, but they only have 21% of online large appliance sales. As online will continue to
outpace offline, we believe they need to ramp up their online channels.
Online strategies
White goods makers adopt different online strategies. The common theme is to evolve their
production/distribution to a consumer-driven model (Consumer-to-Business) from the existing wholesaledriven model (Business-to-Business) by flattening the organisational structure, digitalising their channels
and investing in smart factories.
Midea Group
In 2008, Midea opened its flagship Tmall store. By 2014, the company achieved online retail GMV of
RMB10bn, up from only RMB716m in 2009. It also set up its own e-commerce company in 1H14.
Midea’s online strategies include:
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Figure 63. White goods markers’ online scale
Source: HSBC estimates
 E-commerce and logistics platforms: Midea’s online sales are managed and fulfilled by its distributors.
In the future it wants to aggregate all online sales, product and inventory information under its own ecommerce company, and use one online platform to sell to other online channels. It also wants to further
internalise last-mile logistics to its own logistics platform, Annto. Starting from the end of June 2015, it
plans to use Annto to fulfil all large appliance orders on Tmall by the end of the year.
 Digitalisation: It aims to link its customer, products, and suppliers in one system, and to be able to
manage the whole goods flow, finance flow and information flow real-time on one mobile device.
 Connecting with customer: It wants to establish direct connections with retail customers by starting
its own vertical website: www.midea.com and online-to-offline (O2O) flagship stores. The O2O
stores are positioned as one-stop customer service centres by integrating retailing, after services and
member services. Midea had 1,900 flagship stores at end-2014 and plans to increase this to 3,0004,000 by 2016.
Qingdao Haier
Qingdao Haier was an early mover to the online channel. It started e-commerce in 2012 through its own
e-commerce company and it also provides consumers with customised appliances under the “Leader”
brand online. In 2014, its online sales reached 8% of the total revenue and 11% of domestic appliance
sales after growing 150% y-o-y. This includes sales from its vertical e-commerce website: ehaier.com and
sales from JD.com, Tmall, Egou under Suning and Gome.
Haier has already integrated its internal distribution and logistics sources under one platform that is open to
third parties. As of 2014, third-party integrated channel services (ICS) accounts for 19% of Qingdao Haier’s
total revenue. Meanwhile, Haier wants to transform its distribution network into an O2O service platform.
Gree
Air conditioners require specialised installation and after-sales services, so online penetration is the
lowest among large appliances, at only 11%. Gree was slower than the other two to move online. In 2014,
Gree joined Tmall’s “11.11” promotion for the first time and recorded RMB140m sales. Later, it
announced an O2O cooperation with Alibaba to connect its 20,000 speciality stores to Alibaba’s online
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Consumer Brands & Retail
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June 2015
platform. In March 2015, Gree formally launched its own e-commerce website: mall.gree.com. However,
in 2014, only 1% of Gree’s domestic appliance sales were made online and the company is still at an
early stage in terms of digitalising its products and online services.
Industry 4.0
The government this year launched its Made in China 2025 initiative, which is modelled on Germany’s
Industry 4.0 – a reference to the fourth industrial revolution – a programme launched in 2013. Beijing
wants to upgrade the country’s manufacturing sector, led by innovation, automation and the internet. We
now compare the three white goods makers’ investments in smart factories, which are essential for order
customisation and virtual control of the production process.
Qingdao Haier
As of the end of 1Q15, Haier had four smart factories and 40 unmanned automatic production lines. Its
first smart factory was built in Shenyang in 2014 for manufacturing refrigerators. This factory supports
the customisation of 500 SKUs on nine production platforms. The three other smart factories started
operations in 1Q15 – one for front-loading washing machines in Foshan, one for air conditioners in
Zhengzhou, and another for electric water heaters in Huangdao district, Qingdao.
Midea
Midea started automating its air conditioner manufacturing process in 2011. As a result, the number of
employees at its air conditioning unit has fallen from more than 50,000 in 2011 to 26,000 in 2014. Midea
has four unmanned automatic production lines. The next step is virtual control and monitoring of all air
conditioner production and trials are underway at its factories in Nanshan and Wuhan.
Gree
We have not found any detailed information; however, chairman, Mrs. Dong Mingzhu, has said that
automation and smart appliances are high priorities, according to the AGM on 1 June 2014.
Management incentives
We now compare the three companies’ management incentive schemes.
Midea Group
We believe Midea Group has the best management incentive scheme of the three companies. Through its
group listing in September 2013, Midea achieved:
 The alignment of core management team’s interests with the listed company: Before the group’s
listing, the core management team received compensation from both the listed company and the
unlisted group. After the listing, the team holds shares in the listed company, aligning the team’s
interests with minority shareholders.
 Highest management equity holding ratio: In April 2012, Midea Holding (the largest and controlling
shareholder) transferred its 3% stake in Midea Group at RMB44.56 per share to Ningbo Meicheng
(宁波美晟). Meicheng is a partnership company held by 47 leading members of the management
team. Together with other management equity holding plans, as of May 2015 the management team
in aggregate holds a 6.5% equity stake in Midea.
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June 2015
Figure 64. Midea option plans
First
Announcement date
Option issue date
No of participants
No of shares (m)
As % of total shares
Options exercise price (RMB)
Vesting periods
Vesting conditions on performance
1/13/2014
2/25/2014
626
91
2.2%
20.00
2015 (33.3%), 2016 (33.3%), 2017 (33.3%)
 2015: 2014 core profit growth >15% (actual
142.8%), ROE > 20% (actual 26.61%)
 2016: 2015 core profit growth >15%, ROE > 20%
 2017: 2016 core profit growth >15%, ROE > 20%
Second
3/31/2015
5/28/2015
733
84
2.0%
30.54
2016 (33.3%), 2017 (33.3%), 2018 (33.3%)
 2016: 2015 core profit growth >15% , ROE > 20%
 2017: 2016 core profit growth >15%, ROE > 20%
 2018: 2017 core profit growth >15%, ROE > 20%
Source: Company reports
 A share option plan: In February 2014, Midea’s AGM approved its first “management share option
plan”. As of the end of 2014, the plan covers a total of 626 employees and the unvested option shares
totalled 90,66m, about 2.4% of the total shares. The second option plan was announced in Mar 2015.
At the AGM in April 2015, Midea also announced that it was starting a “partnership asset management
plan” covering 31 of the company’s core management team. It will use the employees’ own funds and
borrowed money to purchase Midea Group’s shares from the secondary market. The size of the plan has
since been raised to RMB230m from RMB115m. The shares purchased are subject to a 12-month lock-up
period and will be granted to individual participants if they can meet annual performance targets. The
shares will be unlocked over a three-year period, starting from 2018.
The group’s 2015 general performance target is annual profit growth of more than 15% and ROE above
20%. Excluding the new partnership asset management plan, the management team in aggregate holds
more than 9% of Midea Group’s shares through direct equity stakes and share options, the highest level
among the three companies.
Qingdao Haier
From 2009, Qingdao Haier has issued four share options plans, gradually increasing the number of staff
covered. The fourth plan came after KKR became a strategic investor, covering 454 employees,
representing close to 1.8% of the company’s shares outstanding. The performance target is to deliver a
15% profit CAGR in 2014-16. However, Qingdao Haier’s management does not directly own many
Haier shares. As of end of 2014, the top 17 managers held in aggregate 9,576,600 shares, about 0.31% of
total shares outstanding.
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Figure 65. Qingdao Haier option plans
Announcement date
Option issue date
No of participants
No of shares (m)
As % of total shares
Options exercise price (RMB)
Restricted share price (RMB)
Vesting periods
Vesting conditions on
performance
First
Second
Third
Fourth
5/1/2009
10/28/2009
49
35
9/1/2010
2/9/2011
68
22
5/1/2012
6/27/2012
200
26
4/12/2014
2/26/2015
454
54 (47.6m options, 6.9m
restricted shares)
1.8%
16.63
7.73
2016 (40%), 2017 (60%)
2.6%
5.24
NA
2010 (10%), 2011 (20%), 2012
(30%), 2013 (40%)
 2010: 2009 core profit growth
>18% (actual 35%), ROE > 10%
(actual 14.0%)
 2011: 2010 core profit growth
>18% (actual 54%), ROE > 10%
(actual 22.2%)
1.6%
10.11
NA
2012 (30%), 2013 (30%), 2014
(40%)
 2012: 2011 core profit growth
>18% (actual 48%), ROE > 10%
(actual 25.6%)
 2012: 2011 core profit growth
>18% (actual 48%), ROE > 10%
(actual 25.6%)
 2014: 2013 core profit growth
>18% (actual 18%), ROE > 10%
(actual 23.5%)
 2013: 2012 core profit growth
>18% (actual 30%), ROE > 10%
(actual 24.2%)
1.0%
10.36
NA
2013 (50%), 2014 (50%)
 2013: 2012 core profit
 2016: 2015 core profit
growth >12% (actual 30%),
growth >15%, ROE > 20%
ROE > 10% (actual 24.2%)  2017: 2016 core profit
 2014: 2013 core profit
growth >15%, ROE > 20%
growth >15% (actual 18%),
ROE > 10% (actual 23.5%)
 2013: 2012 core profit growth
>18% (actual 30%), ROE > 10%
(actual 24.2%)
Source: Company reports
Gree
Gree do not have a share option plan in place. As of the end of 2014, the top five managers held in
aggregate 28.3m shares, about 0.94% of the total shares outstanding.
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abc
Peer comparison
 We compare the three companies on returns, cash flows, scale,
growth rates, margins and segment contribution
 Gree has highest returns on invested capital and Qingdao Haier
has the best operating cash flow cycle
 Through restructuring, Midea has delivered the largest
improvement in margins and growth rates since 2012
ROIC
In Figure 66, we compare the return on invested capital (ROIC) and ROIC drivers of the three white good
manufactures. Gree has the highest in terms of return on equity, assets and invested capital, as it has the
highest net margin and asset turnover. In 2012-14, both Gree and Midea increased their ROIC due to
improving net margin. ROIC for Qingdao Haier’s declined to 14% in 2014 from 18% in 2012 as its asset
turnover fell. Its invested capital rose as gross debt borrowings and share capital increased.
In our calculation, we use the average of balance sheet items and our calculation for invested capital
includes all interest-paying liabilities, total equity of the company and net deferred tax liabilities. In the
table, we also compare the ROIC drivers, including GPM and cash flow.
Gree had the highest GPM (36.6%) last year. However, if selling & marketing expenses are subtracted
from the GPM, the three companies have similar mid-teen contribution margins. The reason for this is
different business model for sales & distribution (details in the company sections). For example, Gree has
a higher GPM with higher ex-factory prices, but it also gives higher sales rebates to distributors listed
under selling and marketing expenses. Midea has a similar distribution model. Qingdao’s ex-factory
prices are already net of sales rebates and the selling and marketing expenses are lower as the company
sells directly to its sales offices. All three companies have strong operating cash flows.
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Figure 66. ROIC comparison table
_______________ Gree _________ ______________ Midea ____________ ___________ Qingdao Haier __________
2012a
2013a
2014a
2012a
2013a
2014a
2012a
2013a
2014a
(restated)
Net margin
7.4%
Core net profit margin incl. hedging loss/gain
7.2%
Asset turnover
1.04
Average TA to Equity
4.19
ROE
32.1%
ROA
7.7%
ROIC
18.4%
Dividend payout ratio (% of reported net profit)
41%
Total assets (RMBm)
107,567
Total liabilities (RMBm)
79,987
Total revenue (RMBm)
100,110
y-o-y %
19.9%
Reported core net profit incl. hedging (RMBm)
7,213
y-o-y %
40.1%
A. GPM
26.6%
B. Selling & marketing expense ratio (%)
14.6%
C. Administration expense ratio (%)
4.1%
Contribution margin (A-B) (%)
12.0%
D. OPM (%)
8.1%
Working capital
Inventory turnover days
85.9
Raw material
30.4
Trade + bills receivable days
130.4
Trade + bills + deferred payable Days
235.7
Working Capital Days (WC *365 / COGs)
28.5
Sales rebates provision as % of net profit
194%
OP cash inflow / revenue ratio
18.4%
OP cash inflow / OP ratio
226.3%
9.1%
8.8%
1.00
3.83
34.5%
9.0%
22.5%
42%
133,702
98,235
120,043
19.9%
10,613
47.1%
32.6%
18.8%
4.2%
13.9%
9.4%
10.1%
9.6%
0.97
3.60
35.1%
9.8%
29.3%
64%
156,231
111,099
140,005
16.6%
13,492
27.1%
36.6%
20.6%
3.4%
16.0%
12.1%
3.2%
3.4%
1.14
2.85
10.3%
3.6%
11.7%
NA
87,737
54,571
102,713
-23.4%
3,518
1.3%
22.6%
9.1%
5.8%
13.4%
7.8%
4.4%
4.5%
1.31
2.56
14.7%
5.8%
14.0%
63%
96,946
57,865
121,265
18.1%
5,406
53.7%
23.3%
10.3%
5.6%
13.0%
7.6%
7.4%
4.1%
4.8%
5.6%
6.5%
4.0%
4.3%
4.9%
1.31
1.79
1.56
1.30
2.56
3.32
3.12
2.77
24.8%
24.2%
23.5%
20.3%
9.7%
7.3%
7.5%
7.3%
20.1%
18.2%
16.8%
14.0%
40%
31%
30%
30%
120,292
49,688
61,093
75,006
74,561
34,262
41,062
45,886
142,311
79,857
86,606
88,775
17.4% 8.4%(10.8%*) 8.5% (11%*) 2.5% (4.9%*)
9,208
3,177
3,759
4,324
70.3%
30.3%
18.3%
15%
25.5%
25.2%
25.3%
27.5%
10.4%
12.1%
11.9%
13.0%
5.3%
6.5%
6.3%
6.8%
15.1%
13.2%
13.4%
14.5%
9.8%
6.3%
6.7%
7.4%
59.6
29.9
146.4
216.4
61.8
265%
10.8%
115.1%
35.7
18.3
13.8.5
166.3
89.8
330%
13.5%
112.2%
61.3
13.5
79.1
131.3
32.2
103.2%
7.9%
101.6%
59.8
14.3
66.5
113.3
33.3
138.1%
8.3%
109.5%
51.9
10.8
67.9
127.0
16.2
127.9%
17.4%
176.9%
43.4
23.6
69.5
144.1
(7.8)
NA
6.9%
110.5%
39.0
15.2
84.5
166.0
(13.9)
NA
7.5%
111.5%
42.9
14.2
89.3
180.6
(14.4)
NA
7.9%
106.5%
Source: Company data. HSBC estimates (note *: the growth is revenue growth by excluding the impact of parts and non-main business sales)
Working capital
In 2014, Qingdao had the best working capital cycle – it was negative. The difference in working capital
cycles is again due to the difference in sales and distribution models. As 70% of Qingdao Haier’s
products are sold through internal channels, it means its working capital turnover includes the negative
working capital cycle at the retail channel. In comparison, the working capital cycle of Gree and Midea
only reflects that at the manufacturing end.
Figure 67. Working capital cycle comparison
____________ Midea _____________
2012
2013
2014
Inventory turnover days
Raw material
Trade + bills receivable Days
Trade + bills + deferred rev payable Days
Working capital cycle
Working Capital Days
61.3
13.5
79.1
131.3
9.0
32.2
Source: Company data (Working Capital Days = Working Capital*365/ COGs)
42
59.8
14.3
66.5
113.3
13.0
33.3
51.9
10.8
67.9
127.0
(7.3)
6.2
______________ Gree _______________ ___________ QD Haier ____________
2012
2013
2014
2012
2013
2014
85.9
30.4
130.4
235.7
(19.4)
28.5
59.6
29.9
146.4
216.4
(10.4)
61.8
35.7
18.3
138.5
166.3
8.0
89.8
43.4
23.6
69.5
144.1
(31.3)
(7.8)
39
15.2
84.5
166.0
(42.5)
(13.9)
42.9
14.2
89.3
180.6
(48.3)
(14.4)
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Consumer Brands & Retail
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June 2015
Revenue scale
In Figure 68-69, we compare the sales scale of the three companies at the listed company level. At Qingdao
Haier’s parent company there are about RMB15bn in appliances-related sales, which are planned to be injected
into the listed company by January 2016, according to an announcement on 18 January 2011. This part of
business is not included in our comparison.
Figure 68. Main business sales scale (2011-14)
Figure 69. Total revenue scale (2011-14)
140
160
120
140
100
120
20
0
2013
88.8
2012
142.3
140.0
121.3
120.0
86.6
40
20
102.7
100.1
79.9
60
134.1
80
83.5
73.7
40
131.1
122.7
88.2
96.1
91.2
79.2
132.1
76.8
73.0
60
112.4
108.1
85.7
100
80
0
2011
2012
Midea
2013
Gree
2011
2014
QD Haier
Midea
Source: Company reports
Gree
2014
QD Haier
Source: Company reports
Net profit scale comparison
In Figure 70, we compare the three companies’ net profit and y-o-y growth rates in core profits, taking
into account of hedging losses/gains.
Figure 70. Core net profit & growth
30
40.1%
25
RMB bn
40%
15.0%
18.3%
20%
0%
1.3%
15
80%
60%
27.1%
47.1%
30.3%
20
70.3%
53.7%
-20%
-40%
2012
Midea
Gree
Midea YoY % (RHS)
-60%
4.3
2013
QD Haier
13.5
9.2
10.6
3.8
0
3.2
3.5
7.2
5
5.4
10
-80%
-100%
2014
Gree YoY % (RHS)
QD Haier YoY % (RHS)
Source: Company Reports(use net profit incl. hedging loss / gain for Midea and Gree)
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Growth
In Figure 71, we compare the revenue growth in 2011-14. Qingdao Haier’s revenue growth was the
smoothest thanks to its diversified product portfolio and its direct control of distribution channels, which
reduced the volatility from inventory cycles.
Figure 71. Sales y-o-y % growth
50.0%
37.3%
40.0%
30.0%
28.2%
20.0%
19.9%
19.9%
16.6%
18.1%
11.0%
21.6%
10.0%
17.4%
11.3%
* 6.0%
0.0%
-10.0%
-20.0%
-23.4%
-30.0%
2011
2012
Midea
2013
Gree
2014
QD Haier
Source: Company reports (* the 2014 revenue growth for Qingdao Haier has been adjusted based on a reduction in connected transactions between the parent and the listco)
Midea’s sales dropped sharply in 2012 due to overexpansion and an inventory build-up in 2009-11. After
it scaled back growth started to recover and in 2014, revenue from its main business was RMB131bn,
close to that of RMB132bn in 2011.
Gree’s sales have outperformed the other two thanks to market share gains in air conditioner sales. It was
able to gain share by maximising the leveraging of its distributors’ working capital under the “higher
GPM, higher selling expenses” model.
Sales by product
Figure 72. Revenue breakdown by segments (2014)
150
0.5%
RMB bn
3%
100
142
7%
140
1%
11%
23%
2%
2%
1%
89
7%
7%
5%
85%
50
51%
7%
23%
Midea
Air conditioners
Motors
Income from financial services
44
17%
1%
28%
0
Source: Company reports
20%
Gree
Refrigerators
Logistics/ ICS
Washing machines
Others
QD Haier
Small appliances
Other product sales
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Consumer Brands & Retail
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June 2015
Figure 73. 2014 sales value of air conditioners
140
Figure 74. 2014 sales value of small appliances
120
30
100
25
72.7
80
RMB bn
RMB bn
32.7
35
118.7
60
40
15
10
20.0
20
20
6.4
5
0
1.8
0
Midea
Gree
Air conditioners
QD Haier
Source: Company data
Midea
Gree
Small appliances
QD Haier
Source: Company data
In 2014, Midea’s net revenue was RMB142.3bn, similar to that of Gree (RMB140bn). Qingdao Haier
revenue totalled RMB88.8bn in the same period (Qingdao Group will inject all appliance-related business
into Qingdao Haier by January 2016, according to an announcement made in January 2011).
Qingdao Haier has the most diversified revenue stream. Integrated Channel Services (ICS), that provide
distribution and logistics services to third parties, accounted for 19.6% of revenue in 2014. Apart from ICS,
equipment parts accounted for another 4.9%. These sales were mostly connected transactions with its
parent company, and the number has fallen from 9% in 2012 in line with a commitment made by the parent
in 2011. Qingdao Haier also has the most diversified portfolio of large appliances, with air conditioners,
washing machines and refrigerator accounting for 23%, 17% and 28% of its revenue in 2014, respectively;
small appliances, including kitchen appliances and water heaters accounted for about 7%.
Air conditioner sales account for 85% of Gree’s total revenue, with the balance coming from small
appliances and industry products under the TOSOT brand.
Midea has the most diversified product portfolio. Large and small appliances accounted for 65% and 23%
of revenue, respectively, with the rest coming from motor and other product sales. For large appliances,
air conditioners, washing machines and refrigerator sales accounted for 51%, 7%, and 7% of
revenue, respectively.
Figure 75. 2014 sales value of refrigerators of the companies
Figure 76. 2014 sales value of washing machine of
the companies
30
25
25
RMB bn
RMB bn
20
15
10
10
5
0
Midea
Source: Company data
Gree
Refrigerators
QD Haier
18
16
14
12
10
8
6
4
2
0
15
10
Midea
Gree
Washing machines
QD Haier
Source: Company data
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Sales by region
Midea has the highest revenue from international markets (38%), while export sales accounted for 11.3%
and 12.1% of Gree’s sales and Qingdao Haier’s sales, respectively.
Figure 77. Sales breakdown of main business by regions (2014)
120%
100%
11.3%
12.1%
88.7%
87.9%
Gree
QD Haier
38.0%
80%
60%
40%
62.0%
20%
0%
Midea
Domestic
International
Source: Company Reports
Margins
In Figure 78-85, we compare the gross margins, contribution margins, operating expense ratios, operating
margin and net margins.
GPM
As explained earlier, Gree’s higher GPM is linked to its high selling and marketing costs. A better
comparison is the contribution margin, which is GPM minus the selling expense ratio.
Figure 78. Gross margin
Figure 79. Contribution Margin (GPM-Selling expense to
Revenue ratio)
36.6%
40%
32.6%
35%
30%
25%
20%
26.6%
25.3%
25.2%
22.6%
23.3%
27.5%
15%
14%
25.5%
13%
12%
11%
10%
2012
Gree
Source: Company Reports
2013
Midea
16.0%
16%
15%
46
17%
2014
Qingdao Haier
13.4%
13.9%
15.1%
14.5%
13.4%
13.2%
13.0%
12.0%
10%
2012
Gree
Source: Company Reports
2013
Midea
2014
Qingdao Haier
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June 2015
SGA cost ratio
Midea has the lowest SGA cost ratio for both selling expenses and admin cost ratios. We think this
corresponds to its lower GPM. When we compare contribution margin – GPM minus selling expenses –
Midea and Qingdao Haier are quite similar.
Figure 80. Selling expense to sales ratio
25%
18.8%
20%
20.6%
11.9%
12.1%
5%
8%
6.5%
6.3%
6.8%
6%
14.6%
15%
10%
Figure 81. Admin expense to sales ratio
10.3%
9.1%
13.0%
10.4%
0%
5.8%
5.6%
4%
4.2%
4.1%
2%
5.3%
3.4%
0%
2012
Gree
2013
Midea
2014
2012
Qingdao Haier
Source: Company reports
Gree
2013
Midea
2014
Qingdao Haier
Source: Company reports
OPM
Qingdao Haier’s EBIT margin is the lowest due to a slightly lower contribution margin and also the
contribution from ICS. ICS accounted for 20% of its sales in 2014, but we estimate it generated a net
margin of less than 2%. This implies an 8.7% OP margin, excluding ICS, making it closer to the OPM
generated by Midea.
Figure 82. SGA / revenue
26%
24%
22%
20%
18%
16%
14%
12%
10%
Figure 83. Operating margin
23.0%
18.7%
18.2%
24.1%
14%
19.8%
6%
15.8%
15.6%
2013
2014
9.4%
10%
8%
18.6%
14.9%
12.1%
12%
8.1%
7.8%
9.8%
7.6%
7.9%
7.1%
6.3%
8.7%
7.4%
6.7%
4%
2%
2012
Gree
Source: Company reports
Midea
Qingdao Haier
2012
Gree
Qingdao Haier
2013
2014
Midea
Qingdao Haier excluding ICS
Source: Company reports
Net margins
In addition to reported net profit, we use three other measures of net profit. One is HSBC’s net profit
forecasts, which assess the core profit growth of by stripping out all non-operational gains/losses (our
definition of non-core is similar to those used for Hong Kong-listed stocks). A second is reported core
profit, which is the company’s own measure of its core profit, and it usually includes some financial
gains/losses that considered non-core under HSBC’s net profit forecasts. The last is adjusted core profit,
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including hedging gain/loss by adding back hedging mark-to-market gains/losses to reported profit, as
investors look at hedging as the normal recurring part of business.
Below, we compare the reported core net margin and core net margin, including hedging impact. Similar
to OPM, Gree generated the highest net margin and Qingdao Haier the lowest (but it has the lowest
margin volatility). Using core net margin, including hedging, Gree and Midea exhibit smoother net
margin trends than if the reported core profit measure is used.
Figure 84. Core net margin
Figure 85. Core net margin, including hedging gain/loss net
margin
12%
12%
10.1%
7.4%
7.0%
8%
6.7%
6%
4.9%
4%
2%
2.9%
3.2%
2012
2013
7.2%
6.5%
6%
4.3%
4.0%
8%
9.6%
8.8%
10%
10%
4%
2%
4.5%
3.4%
0%
0%
Gree
2012
2014
Midea
Source: Company Reports
2013
Gree
Qingdao Haier
2014
Midea
Source: Company Reports
Product comparison
We compare the revenue scale, growth rates and GPM of the three companies product by product.
Air conditioners
Air conditioners account for 98%, 58% and 30% of Gree’s, Midea’s and Qingdao Haier’s product sales,
respectively. Gree’s air conditioner sales are roughly six times that of Qingdao Haier and 1.6x that of
Midea. In terms of growth rates, air conditioner sales for Gree, Midea and Qingdao Haier grew 12.5%,
16.9% and 11.6%, respectively, in 2014. GPM for Gree, Midea and Qingdao was 39.8%, 27% and 30.4%,
respectively, in 2014. As discussed earlier, this is mostly due to differences in distribution models.
Figure 86. Air conditioner sales and sales growth
250
100%
18.7%
2012
2013
Midea
QD Haier
Gree YoY % (RHS)
Source: Company Data
48
16.9%
12.5%
11.6%
30%
15%
20
20.8%
73
119
21.4%
45%
39.8%
34.5%
62
105
18
51
89
15
RMB bn
22.0%
18.9%
-26.1%
0
Figure 87. Air conditioner GPM
-150%
2014
Gree
Midea YoY % (RHS)
QD Haier YoY % (RHS)
27.5%
28.5%
27.3%
24.4%
24.5%
30.4%
27.0%
0%
2012
Midea
Source: Company Data
2013
Gree
2014
QD Haier
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Washing machines
Washing machines account for 23% and 8% of Qingdao Haier’s and Midea’s product sales, respectively.
Qingdao Haier revenue in this segment was 53% larger than Midea in 2014. Sales growth for Qingdao
Haier was stable in 2012-14, in line with the industry. Midea’s washing machine sales grew strongly
during the same period, due to a low base and a recovery growth from channel re-stocking.
Qingdao Haier’s washing machine GPM in 2014 was 33.2%, higher than 28.5% for Midea, thanks to a
better product mix and fewer promotions.
Figure 88. Washing machine sales and sales growth
100
29.6%
RMB bn
50%
45%
0%
30%
23.8%
32.9%
8.7%
50
Figure 89. Washing machine GPM
8.1%
6.5%
-44.0%
6.2
13.3
8.1
14.3
0
2012
2013
Midea
Midea YoY % (RHS)
10.0
15.3
-50%
-100%
2014
QD Haier
QD Haier YoY % (RHS)
Source: Company data
15%
33.2%
29.5%
24.2%
26.6%
28.5%
0%
2012
2013
Midea
2014
QD Haier
Source: Company data
Refrigerators
Fridges accounted for 37% and 7.8% of Qingdao Haier’s and Midea’s product sales, respectively. Qingdao
Haier’s refrigerator sales were roughly 2.5x larger than Midea’s in 2014. Hurt by the sagging property
market, refrigerator sales at Qingdao Haier declined 2.6% y-o-y in 2014. Midea recorded 19.6% growth
thanks to a low base and recovery growth from channel re-stocking. Qingdao Haier’s refrigerator GPM in
2014 was 32.1%, higher than Midea’s 24.1%, thanks to a better product mix and fewer promotions.
Figure 90. Refrigerator sales and sales growth
RMB bn
100
36.6%
0.5%
50
-49.6%
6.0
0.6%
-2.6%
8.1
0
2012
2013
Midea
Midea YoY % (RHS)
Source: Company data
45%
0%
30%
-50%
15%
19.6%
25.3
25.2
Figure 91. Refrigerator GPM
50%
24.7
9.7
-100%
2014
QD Haier
QD Haier YoY % (RHS)
30.0%
30.7%
32.1%
24.1%
17.2%
19.1%
2012
2013
0%
Midea
2014
QD Haier
Source: Company data
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Small appliances
Midea’s small appliance sales were 16x times that of Gree and 5.5x that of Qingdao Haier. Small appliances
account for 26%, 9.7% and 1.5% of Midea’s, Qingdao Haier’s and Gree’s product sales, respectively, in
2014. Again, thanks to channel restructuring, Midea outperformed Qingdao Haier and Gree in 2014 by
growing its small appliances sales by 17.5% y-o-y. Qingdao Haier and Gree recorded 6.8% and 10.4%
growth, respectively, in 2014. Small appliances GPM of Qingdao Haier was the highest at 42.3% in 2014.
Figure 92. Small appliance sales and sales growth
-2.4% 8.1%
11.4%
33
28
2
6
26
1
6
0
Figure 93. Small appliance GPM
17.5%
10.4%
6.8%
2012
2013
Midea
QD Haier
Gree YoY % (RHS)
45%
39.7%
41.5%
42.3%
30%
23.6%
24.2%
24.7%
15%
2
6
10.8%
12.5%
-20.8%
RMB bn
50
-250%
2014
Gree
Midea YoY % (RHS)
QD Haier YoY % (RHS)
Source: Company data
22.6%
19.9%
23.3%
0%
2012
Midea
2013
Gree
2014
QD Haier
Source: Company data
Conclusion
We draw the following conclusions:
 The industry generates strong cash flow with operating cash flows consistently exceeding
operating profits.
 Gree has the highest returns (ROE, ROA and ROIC) as it has the highest net margin and
asset turnover.
 While Gree has the highest GPM, the three companies’ contribution margins are quite similar, due to
differences in the booking of sales rebates and distribution strategies.
 Gree and Midea have strong profit buffers in the form of a “sales rebates provision”, about 1-3 times
their one-year profits.
 Distributing directly through its own sales offices, Qingdao Haier has the smoothest growth profile
and best working capital cycles.
 As a result of restructuring, Midea has delivered the most improvement in margins and growth rates
since 2012.
 Qingdao Haier’s OPM adjusted for the lower margin ICS business is quite similar to Midea; still,
Gree has the highest OPM.
 Qingdao Haier has the most diversified product portfolio for large appliances; Midea has the highest
contribution from small appliances.
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Midea (000333 CH)
 We forecast Midea to deliver a 13% CAGR in revenue and a
19.4% CAGR in profit in 2014-17
 Midea has the best-incentivised management team among peers,
delivering above-peer-average growth from market share gains
 Initiate with a Buy rating and a DCF-based fair value target price
of RMB46.9
Company description
Midea was established in 1982 in Shunde, Guangdong, as an electric fan manufacturer. The group’s sales
reached RMB142bn in 2014, with large appliances accounting for 65% of total sales and small appliances
accounting for 23% of total sales. Its businesses now encompass the manufacturing of air conditioners,
refrigerators, washing machines, as well as small household appliances, motors and logistics. The brands
owned by Midea include “Midea”, “Little Swan”, “Welling” and “Hualing”. Its sales network has 100%
coverage in tier-1 and -2 cities and above 95% coverage in tier-3 and -4 cities through its 70,000
distributors (4,600 first tier distributors and sub-distributors) with 15,000 specialty stores and 45,000
points of sales (POS) at the county and township level. Out of the revenue generated by its main business,
38% are exports and more than 60% of exports are under its own brand or ODM. It has six international
production bases in Vietnam, Russia, Egypt, Brazil, Argentina and India.
Figure 94. Midea brand portfolio
Source: Company data
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Corporate structure
Midea Group is managed under 12 business units: nine for appliances manufacturing, two for parts
manufacturing and one for logistics.
Before it was listed, the group was managed under a three-tier system: the group level, under which were
five business groups (cooling group, household electronics group, motor equipment group, logistics group
and international business group), under which were 12 business units.
After its listing, the group streamlined its organisational structure, removing the middle layer, with the
group level now directly managing the 12 business units. This reorganisation means senior management
is now more incentivised to help drive the whole group’s profits and returns, whereas under the old
structure they were incentivised to drive the profits and returns of their respective business group.
Now, at the group level, the group functions are only limited to strategic planning, administration, human
resources, and finance and auditing. All production-related functions are managed at the business unit level.
Figure 95. Midea corporate structure
Midea Group
Source: Company data, HSBC
Group restructuring
On 12 November 1993, Midea Electronics was listed on the Shenzhen Stock Exchange under the stock
code 000527 CH. Its ultimate controlling shareholder, Midea Holding, a private company owned by
founder Mr. He Xiangjian and his family, held a 42.94% stake in Midea Electronics through Midea
Group after the listing.
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Logistics
Small appliances
Electric motor
Water heater
Environmental appliances
Washing appliances
Kitchen appliances
Household appliances
Compressor
Washing machine
Fridge
Central air conditioner
Home air conditioner
Large appliances
Electric
motor
Logistics
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In 2000, management completed a management buyout (MBO) of Midea Electronics from a collectively
ownership enterprise.
In March 2006, Midea Electronics implemented a non-tradable share reform, making all its shares
tradable.
From November 2011 to March 2012, Ding Hui Investment and four other strategic investors
accumulated a 21.15% stake in Midea Group, the holding company of Midea Electronics. This 21.15%
stake was equivalent to a 12.5% stake in Midea Group after the IPO. The consideration was RMB11.1bn,
equivalent to RMB52.5 per share in listed Midea Group. These investors were subject to a one-year lockup after the listing of Midea Group.
On 18 September 2013, Midea Group completed its listing under the stock code 000333 CH, with Midea
Electronics simultaneously being delisted. After the corporate restructuring, Midea Group still owned two
listed subsidiaries, Little Swan (000418 CH) for washing machine manufacturing and Welling (382 HK)
for motor manufacturing. Following the listing, the business exposure of Midea Group’s parent company,
Midea Holding, was limited to property development, financial investments, commodity trading and other
non-core assets.
Shareholding structure
Figure 96. Midea Group current shareholders structure
Controlling
shareholder
36.24%
Strategic
investors
12.38%
Xiaomi
1.29%
Management
team
6.50%
Public investors
43.59%
Midea Group
Source: Company report
Prior to the listing of Midea Group, the interests of the core management team, comprising seven
members, were not aligned with those of the minority shareholders of the listed Midea Electronics. At the
time, the core management team had a 16% equity interest in the then-unlisted Midea Group (which
owned various white goods businesses with potential conflicts of interest with the listed Midea
Electronics), and were being remunerated both by Midea Group and Midea Electronics.
After the listing of Midea Group, an incentive share plan was implemented for core management staff of
the group and its major subsidiaries in 2012, which more closely aligned management’s interests with
those of the minority shareholders. Under the arrangement, parent Midea Holding transferred a 3%
interest in Midea Group to the incentive share plan (named Ningbo Meicheng Equity Investment
Partnership). A total of 47 members of core management participate in this incentive share plan.
In December 2014, Midea Group issued 55m new shares to Xiaomi Technology. After the issuance, the
controlling shareholder Midea Holding, various strategic private equity investors, Xiaomi, management
and public investors now hold 36.24%, 12.38%, 1.29%, 6.50% and 43.59%, respectively.
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Figure 97. Midea domestic sales breakdown by channels
Others
10%
Online
10%
Specialty
stores
40%
Traditional
channel
20%
National
KA
20%
Source: HSBC estimates
Sales and distribution
Decentralised sales and marketing
Midea Group’s sales and marketing functions have been decentralised to individual business units (BU).
Each BU is not only responsible for product research and production, and also an integrated platform for
research, production and sales.
Midea Group’s sales network is managed by its distributors and supervised by each BU’s marketing
function. The group headquarters decide the sales budget, and the each BU has autonomy in managing its
own P&L and deciding its own sales and marketing plan. Under this decentralised system, headquarters
no longer provide a sales guarantee to each BU.
Distributorship
Air conditioner sales are managed by the group’s distributors through 40 sales offices (since 2013), and
Midea Group sells directly to the sales offices. The sales channel for air conditioners, refrigerators and
washing machines are managed independently, and each POS can decide on their own inventory.
Its sales networks are managed under regional distributorships. Regional distributors are classified as
first-tier distributors, and there are 4,600 of them. There are 52 sales companies in total in the air
conditioner business. The ownership structure of these sales companies was quite diversified. Now,
Midea encourages one to two largest distributors to buy out the minority stakes from other shareholders to
concentrate the ownership structure in the sales companies.
Inventories are sold to first-tier distributors on a cash basis. Under regional distributors, there are subdistributors to cover all sales channels, including national key accounts (KA), specialty stores, traditional
channel and online channel.
Midea Group headquarters takes responsibility for advertising and designing promotional strategies. Its
regional distributors will be responsible for selecting sales channels, POS promotion and sales subsidies,
logistics and warehousing services.
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The group’s sales network covers 15,000 specialty stores (10,000 for large appliances and 5,000 for small
appliances) and 45,000 point of sales (POS) at county and township and total 85,000 national wide
(30,000 for large appliances and 55,000 for small appliances) through its 70,000 distributors 4,600 first
tier distributors and sub-distributors).
Midea Group began launching O2O flagship stores in 2013 and had a total of 1,900 such stores as at the
end of 2014. The group is targeting to open up to 2,500 flagship stores in 2015 and 3,000-4,000 in 2016.
The group is also targets to open 100 experience centres for air conditioners.
Overseas, Midea Group has built a total of 3,800 POS as at end-2014, up 46% from the previous year.
Details discussion of Midea’s export strategies are provided under Chapter “comparison of strategies”.
Investment thesis
Stronger growth among peers
We forecast Midea to deliver a 13% CAGR in revenue and a 19.4% CAGR in profit in2014-17, faster
than the other two peers. The fast growth is thanks to:
 Recovery growth in market shares
After its overexpansion in 2009-11, Midea’s sales fell 23% y-o-y in 2012. Through channel
restructuring, Midea was able to regain market share in 2013-14, but revenue generated from its core
products range in 2014 (RMB131bn) was still marginally what it generated in 2011 (RMB132bn).
We expect the recovery in market share to continue over our forecast period.
 A diversified product portfolio
Midea has the most diversified product portfolio in its peer group and still has room to further gain
market shares in various product categories, in our view. Large appliances and small appliances
accounted for 65% and 23% of its revenue, respectively, with the rest derived from motors and other
product sales. In the large appliance segment, the three key products are air conditioners, washing
machines and refrigerators, which accounted for 51%, 7%, and 7% of its revenue in 2014,
respectively. In terms of sales revenue, Midea is ranked second for air conditioners, washing
machines and water heaters, and fourth in refrigerators.
 Improving profitability
With better economies of scale by each segment, we believe Midea has room to further improve
profitability across categories.
Fast mover in the era of Industry 4.0
Industry 4.0 is the collective term for technologies, such as the Internet of Things and Internet of
Services, which aim to create a highly interconnected data environment for production, distribution and
services. We believe Midea is becoming a fast mover in the Industry 4.0 space, as indicated by its
relatively high proportion of online sales (11% of domestic product sales) and early investment in
production automation.
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Currently, Midea’s online sales are managed and fulfilled by its distributors. Going forward, we believe it
can use its own e-commerce company to aggregate all online sales, product and inventory information
under one online platform.
Also, by internalising last-mile logistics (the company has developed its own logistics platform called
Annto) from the end of June 2015, we think it will be able to expedite its progress to digitalise the
distribution process, creating a direct link between its manufacturing facilities and consumers.
In terms of revamping production, Midea started automating air conditioner manufacturing in 2011 and
now has four unmanned production lines, including one line in Shunde, Guangdong. Management intends
to implement full virtual control and digitalisation of the company’s air conditioner production.
Best incentivised management team
In our view, Midea has the best management incentive scheme among the three home appliance makers
we initiate coverage on in this report in terms of both depth and breadth, supporting the group’s
performance target of more than 15% profit growth and above 20%.ROE
Approved at the AGM in April 2015, Midea has launched a “partnership asset management plan”. The
scheme covers 31 of the company’s core management and will use these employees’ own funds and
borrowed money to purchase Midea Group’s shares from public shareholders. This plan further aligns
management’s interests with those of minority shareholders.
Excluding the new “partnership asset management plan”, management in aggregate holds a 9% interest in
Midea Group’s shares through direct equity stakes and share options; this is the highest level among the
three home appliance makers we initiate coverage on in this report and its option plan covers total 626
employees.
Earnings estimates
Our earnings estimates are largely derived from our estimates of revenue, gross margins, selling and
administrative operating costs, and net finance income. In the normal course of business, Midea hedges
its exposure to foreign currency and raw material price fluctuations through futures and forward contracts.
We do not attempt to model the marked-to-market gains and losses from these hedging activities, but we
note they can have a meaningful impact the company’s reported earnings.
Revenue
We forecast Midea to deliver 12.4% y-o-y revenue growth in 2015 and a 13% CAGR in revenue in 201417. We expect the growth in air conditioner sales – at 11.7% in 2015 – will be an important driver. Air
conditioners are the group’s key product category, accounting for 51.1% of total revenue and 58% of
product sales revenue in 2014.
For its main products, we forecast revenue using bottom-up approach based on our estimates of volume
market share and ASP. We forecast air conditioner revenue in 2015 to grow by 11.7% y-o-y, while
refrigerator and washing machine revenue grows by 15.8% and 16.9%, respectively. Our key assumptions
are outlined in Figure 98.
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Figure 98: Midea Large Appliances forecast (RMBm, ‘000 UNITS)
Air conditioner forecasts
Sales from Air Conditioners
y-o-y %
Total Volume ('000 unit)
y-o-y %
Total ASP
y-o-y %
Domestic Air conditioner
- Sales volume ('000 unit): IOL
y-o-y %
- Midea market share (%): IOL
Export Air conditioner
- Sales volume ('000 unit): IOL
y-o-y %
- Midea market share (%): IOL
Washing machine forecasts
Sales from Washing Machine
y-o-y %
Total Volume ('000 unit)
y-o-y %
Total ASP
y-o-y %
Domestic Washing machine
- Sales volume ('000 unit): IOL
y-o-y %
- Midea market share (%): IOL
Export Washing machine
- Sales volume ('000 unit): IOL
y-o-y %
- Midea market share (%): IOL
Refrigerator forecasts
Sales from Refrigerators
y-o-y %
Total Volume ('000 unit)
y-o-y %
Total ASP
y-o-y %
Domestic Refrigerator
- Sales volume ('000 unit): IOL
y-o-y %
- Midea market share (%): IOL
Export Refrigerator
- Sales volume ('000 unit): IOL
y-o-y %
- Midea market share (%): IOL
2014a
2015e
2016e
2017e
CAGR (2014-17e)
72,705
16.9%
29,027
8.1%
2,505
8.1%
81,201
11.7%
31,784
9.5%
2,555
2.0%
92,278
13.6%
34,730
9.3%
2,657
4.0%
104,900
13.7%
37,963
9.3%
2,763
4.0%
13.0%
70,010
12.3%
24.0%
74,401
6.3%
24.3%
79,072
6.3%
24.5%
84,042
6.3%
24.7%
6.3%
46,786
-4.1%
26.1%
51,464
10.0%
26.6%
56,611
10.0%
27.1%
62,272
10.0%
27.6%
10.0%
9,974
23.8%
10,218
15.7%
976
7.0%
11,664
16.9%
11,273
10.3%
1,035
6.0%
13,418
15.0%
12,234
8.5%
1,097
6.0%
15,415
14.9%
13,260
8.4%
1,163
6.0%
15.6%
38,528
2.2%
20.7%
40,154
4.2%
21.4%
41,848
4.2%
22.0%
43,613
4.2%
22.6%
4.2%
19,370
6.2%
11.6%
20,338
5.0%
13.1%
21,355
5.0%
14.1%
22,423
5.0%
15.1%
5.0%
9,724
19.6%
7,034
6.6%
1,382
12.1%
11,260
15.8%
7,757
10.3%
1,452
5.0%
12,708
12.9%
8,418
8.5%
1,510
4.0%
14,008
10.2%
9,009
7.0%
1,555
3.0%
12.9%
52,981
-5.2%
8.8%
55,440
4.6%
9.5%
58,033
4.7%
10.0%
59,654
2.8%
10.5%
4.0%
23,307
11.0%
10.2%
24,473
5.0%
10.2%
25,696
5.0%
10.2%
26,981
5.0%
10.2%
5.0%
9.4%
3.3%
9.1%
6.0%
9.2%
8.6%
4.0%
Source: Company data, IOL, HSBC estimates
For small appliances, which accounted for 23% of revenue in 2014, we estimate revenue to grow 10% in
2015 and at a 10% CAGR in 2014-17.
We forecast the overall revenue of the group to grow by 12.4% in 2015 and at a 13% CAGR in 2014-17.
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Figure 99. Midea revenue breakdown
6.8% 7.5%
51.1%
2017
7.0% 7.4%
50.9%
2016
50.7%
2015
7.0% 7.3%
6.8% 7.0%
2014
51.1%
0
Figure 100. Midea gross profit breakdown
1.5%
0.7%
21.2% 2.1% 8.9%
1.5% 0.6%
21.8% 2.3% 8.4%
1.5% 0.5%
70
Air conditioners
Washing machines
Motors
Other product sales
140
210
Refrigerators
Small appliances
Logistics
Income from financial services
Source: Company data, HSBC estimates
6.5% 7.8%
54.1%
0
20.1%1.4%6.5%
0.7% 0.7%
21.0%1.5%6.2%
0.7% 0.7%
6.7% 8.1%
55.2%
2014
23.0% 2.8% 7.5%
0.7% 0.9%
19.3% 1.3%6.8%
0.7% 0.8%
6.7% 8.2%
55.6%
2016
2015
22.5% 2.5% 8.0%
1.4% 0.5%
6.5% 8.4%
56.1%
2017
22.3%1.8%6.2%
20
Air conditioners
Washing machines
Motors
Other product sales
40
60
Refrigerators
Small appliances
Logistics
Income from financial services
Source: Company data, HSBC estimates
Gross profit margin
The cyclical drivers of the group’s gross profit margin (GPM) are:
 Fluctuations in raw materials costs: raw materials accounted for 78% of COGS in 2014
 Price wars: would lower selling prices and, therefore, GPM
 Currency fluctuations: RMB appreciation leads to a cut in FOB export prices and lower export GPM
The structural drivers for GPM are:
 ASP and product mix: a greater sales contribution from high-end/new products lifts GPM
 Cost optimisation: automation, factory utilisation rates, manufacturing cost optimisation will
gradually improve GPM
 Regional mix: the share of exports in total sales; more exports leads to a lower blended GPM.
Exports accounted for 38% of its core business sales in 2014, and we expect the ratio to be stable
However, as Midea adopts a wholesale model by selling through its distributors, it is more relevant to
look at the contribution margin (which is GPM minus selling and marketing expenses), taking into
account wholesale prices changes and promotion subsidies paid to distributors. We summarise the key
assumptions used in our GPM forecasts in Figure 101.
We forecast GPM in 2015 to expand by 160bp to 27.1%, driven mainly by a decline in raw material
prices. As we estimated earlier in the chapter “2015: better 2H over 1H”, for every 10% change in the
cost of raw materials for air conditioners, refrigerators and washing machines, the GPM would on average
expand by 5-6 ppt. For the year to date, the blended average cost of manufacturing refrigerators, air
conditioners, washing machines and heaters has declined by 10%, 8%, 7% and 8%, respectively.
Our forecast of 2015 GPM expansion due to a decline in raw materials costs is derived mainly from the
air conditioner segment. For the refrigerators and washing machines, we expect Midea to pass on most of
the cost savings it makes from lower raw material costs to its channels in order to gain market shares.
However, we expect the contribution margin to expand by only 130bp to 16.4% in 2015 from 15.1% in
2014, due to significant price competition in air conditioners in 1Q15. We expect marketing and selling
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Figure 101. Gross profit margin
Overall GPM
Air conditioners
Refrigerators
Washing machines
Small appliances
Motors
Logistics
Other product sales
Income from financial services
Contribution Margin
1H14a
2H14a
2014a
2015e
2016e
2017e
26.0%
26.8%
26.9%
29.4%
26.3%
14.8%
9.0%
20.0%
49.0%
16.1%
24.9%
27.1%
21.1%
27.8%
22.9%
17.9%
16.0%
22.0%
19.4%
13.9%
25.5%
27.0%
24.1%
28.5%
24.7%
16.2%
12.7%
21.0%
36.8%
15.1%
27.1%
29.5%
25.6%
30.0%
25.2%
16.2%
12.7%
21.0%
36.8%
16.4%
27.4%
30.0%
26.1%
30.5%
25.2%
16.2%
12.7%
21.0%
36.8%
16.6%
27.7%
30.5%
26.6%
31.0%
25.2%
16.2%
12.7%
21.0%
36.8%
17.0%
Source: Company data, HSBC estimates
expenses to increase by 15.5% y-o-y in 2015 versus 19.5% growth in gross profit and 12.4% growth in
revenue over the same period. As the industry’s inventory levels and price promotions normalise in 2H15,
we expect more of the benefit from lower raw materials prices to filter through to the contribution margin.
Selling, general and administrative
We forecast total SGA to rise by 15.3% y-o-y in 2015 and at a 14.7% CAGR in 2014-17. We expect the
SGA cost to sales ratio to increase to 16.0% in 2015 from 15.6% in 2014.
Figure 102. Expense ratios vs. contribution margin
18%
16%
14%
16.4%
16.6%
17.0%
10.4%
10.6%
10.8%
10.8%
5.3%
5.4%
5.5%
5.6%
2014
2015e
2016e
2017e
15.1%
13.4%
13.0%
12%
10%
8%
9.8%
6%
6.4%
4%
2%
11.0%
4.3%
0%
2012
2013
Selling & distribution expenses to sales ratio
Admin expenses to sales ratio
Contributional Margin
Source: Company data, HSBC estimates
Operating profit
Based on the above revenue, GPM and SGA forecasts, we expect EBIT to grow at an 18.4% CAGR over
2014-17e on a 13% growth CAGR in revenue. In 2015, as we forecast growth in gross profit to outpace
that of SGA, we estimate EBIT to grow by 25.9% y-o-y driven by 12.4% revenue growth and EBIT
margin expansion of 120bp to 11%.
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Figure 103. Operating Profit
11.1%
11.0%
25,000
9.8%
RMBm
20,000
7.8%
10,000
20,108
17,640
7.6%
14,012
15,000
15.7%
12%
8%
14.0%
6%
4%
52.5%
15.3%
5,000
11.3%
10%
25.9%
9,186
7,966
23,265
2%
0
0%
2012
2013
2014
EBIT
2015e
2016e
2017e
EBIT Margin
Source: Company data, HSBC estimates
Net finance income
As discussed later in the cash flow analysis, Midea generates strong cash flows from its operations. Its net cash,
including that from investment products, amounted to RMB29,511m as at end-2014. We forecast net interest
income to come to RMB522m, RMB677m and RMB931m in 2015, 2016, and 2017, respectively.
Figure 104. Net finance income (RMBm)
Interest Income
Cash Balance
Interest Income Rate
Interest Cost
Gross Debt Balance
Interest Cost Rate
Net Interest Income
2013a
2014a
2015e
2016e
2017e
802
19,466
4.1%
-651
11,354
5.7%
151
348
36,366
1.0%
-184
6,855
2.7%
165
727
43,265
1.7%
-206
3,762
5.5%
522
865
55,969
1.5%
-188
3,776
5.0%
677
1,119
66,400
1.7%
-189
0
NA
931
Source: Company data, HSBC estimates
Net profit
Factoring in our estimates of the company’s dividend payout ratio for minority shareholders and effective
tax rate, we forecast net profit to grow by 27.5% y-o-y in 2015 to RMB13,395m from RMB10,502m in
2014. We expect the net profit to increase at a CAGR of 19.4% in 2014-17 versus a 13% CAGR in
revenue over the same period. We are now in line with consensus on 2015 net profit forecast (3.6%
above).
However, there are three ways in which we can gauge Midea’s profit growth. The first is based on the
standard approach used by HSBC to assess the core profit of Hong Kong-listed stocks, stripping out all
non-operational gains and losses. The second is reported core profit, which is the company’s own
measure of core profit, and usually includes some financial gains and losses (but excluding any markedto-market gains and losses from hedging activities) that would be considered non-core by HSBC. The
third is reported core earnings plus marked-to-market gains and losses from hedging activities; some
investors believe hedging activities should be considered part of the company’s recurring earnings.
Our net profit forecasts do not include that for non-core and non-recurring items.
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Figure 105. HSBC estimates vs. Consensus
RMBm
______________ 2015e _____________ ______________ 2016e _____________ ______________ 2017e ____________
HSBC estimates Consensus % diff HSBC estimates Consensus % diff HSBC estimates Consensus % diff
Total revenue
Operating profit
Profit
160,011
17,640
13,395
162,930
17,247
12,935
-1.8%
2.3%
3.6%
181,237
20,108
15,350
186,593
20,620
15,384
-2.9%
-2.5%
-0.2%
205,112
23,265
17,890
207,659 -1.2%
23,518 -1.1%
18,183 -1.6%
Source: Thomson Reuters Datastream, HSBC estimates
Cash flows
We conduct our cash flow forecasts based on working capital forecasts, capex forecasts, and dividend
payout.
Our working capital forecasts assumptions are listed in Figure 106. Midea reported 16 working capital
days in 2014 and we forecast this to steadily increase to 34 days by 2017 by assuming stable inventory
days but slower working capital cycles.
Figure 106: Working capital
Inventory Turnover Days
Raw material
Trade + Bills Receivable Days
Trade + Bills+ Deferred rev Payable Days
Working Capital Days (Working Capital*365/ COGs)
2013a
2014a
2015e
2016e
2017e
59.8
14.3
66.5
113.3
33.3
51.9
10.8
67.9
127.0
16.2
54.1
10.8
66.9
121.8
24.4
54.1
10.8
66.9
118.2
28.5
54.1
10.8
66.9
113.3
33.9
Source: Company data, HSBC estimates
We forecast RMB4bn of capex annually from 2015 to 2017. In 2015, the company guided total capex of
RMB3,600m, with: 1) only RMB800m investments allocated to expanding capacity in small appliances;
2) RMB1,200m for developing global R&D centres and upgrading existing R&D facilities; and 3)
RMB1,600m to upgrade the company’s information and software infrastructure.
In terms of dividend payout, Midea has a dividend policy of paying out more than one third of its
earnings. Midea paid out a 63.4% dividend in 2103 and 40.1% in 2014. We forecast the dividend payout
ratio to remain stable at 40% going forward.
Per forecast in Figure 107, we estimate its net cash position, including investments in wealth management
products, will increase to RMB66.4bn by end-2017 from RMB29.5bn by end-2014.
Figure 107. Cash flows (RMBm)
Net cash from operating activities
Net cash from investing activities
- capex
Net cash from financing activities
Net increase in cash
Cash at beginning of year
Cash at end of year
(Net Debt) / Net Cash
(Net Debt)/ Net Cash including wealth management products
as % of equity
2013a
2014a
2015e
2016e
2017e
10,054
-467
-2,115
-5,364
4,223
14,499
19,003
7,649
8,113
21%
24,789
-28,862
-2,678
-7,410
-11,484
19,003
9,772
2,917
29,511
65%
19,369
-4,000
-4,000
-8,470
6,900
9,772
16,671
12,909
39,503
73%
22,851
-4,000
-4,000
-6,148
12,703
16,671
29,375
25,598
52,192
83%
25,389
-4,000
-4,000
-10,958
10,431
29,375
39,806
39,806
66,400
90%
Source: Company data, HSBC estimates
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Figure 108. Midea earnings estimate summary
(RMBm) Year ended 31 December
Sales
Product sales
Income from financial
Gross profit
Total operating expenses
Selling & distribution expenses
Admin expenses
EBIT
Net finance income
PBT
Net income
HSBC Net income (loss)
Reported Core Profit
Reported Core Profit incl. hedging impact
Margins
Overall GPM
Contribution Margin
SGA / Revenue ratio
S&D
Admin
OPM
EBITDA margin
Reported Net margin
HSBC Net margin
Reported Core Margin
Reported Core incl. hedging impact Margin
y-o-y %
Revenue
GP
Contribution GP
Selling & distribution expenses
Admin expenses
OP
Reported Net profit
HSBC Net Income
Reported Core Profit
Reported Core Profit incl. hedging impact
2010a
2011a
2012
2013a
2014a
2015e
2016e
2017e
110,272
110,262
10
20,038
-13,812
-9,635
-4,177
8,423
-430
7,930
3,746
3,455
3,746
3,746
134,128
134,046
82
25,697
-16,829
-11,630
-5,198
8,815
-948
8,230
3,473
2,609
3,473
3,473
102,713
102,598
115
23,202
-15,316
-9,390
-5,926
7,966
-614
7,710
3,259
2,709
3,027
3,518
121,265
120,975
290
28,242
-19,166
-12,432
-6,733
9,186
151
10,012
5,317
3,927
3,903
5,406
142,311
141,668
643
36,235
-22,232
-14,734
-7,498
14,012
165
13,991
10,502
10,273
9,477
9,208
160,011
159,176
836
43,307
-25,641
-17,018
-8,623
17,640
522
17,980
13,395
13,395
181,237
180,151
1,086
49,671
-29,487
-19,570
-9,916
20,108
677
20,604
15,350
15,350
205,112
203,700
1,412
56,918
-33,518
-22,114
-11,404
23,265
931
24,014
17,890
17,890
18.2%
9.4%
-12.5%
8.7%
3.8%
7.6%
7.6%
3.4%
3.1%
3.4%
3.4%
19.2%
10.5%
-12.5%
8.7%
3.9%
6.6%
6.6%
2.6%
1.9%
2.6%
2.6%
22.6%
13.4%
-14.9%
9.1%
5.8%
7.8%
10.5%
3.2%
2.6%
2.9%
3.4%
23.3%
13.0%
-15.8%
10.3%
5.6%
7.6%
10.1%
4.4%
3.2%
3.2%
4.5%
25.5%
15.1%
-15.6%
10.4%
5.3%
9.8%
12.2%
7.4%
7.2%
6.7%
6.5%
27.1%
16.4%
-16.0%
10.6%
5.4%
11.0%
13.2%
8.4%
8.4%
27.4%
16.6%
-16.3%
10.8%
5.5%
11.1%
13.2%
8.5%
8.5%
27.7%
17.0%
-16.3%
10.8%
5.6%
11.3%
13.3%
8.7%
8.7%
21.6%
28.2%
-23.4%
-9.7%
18.1%
21.7%
17.4%
28.3%
12.4%
19.5%
13.3%
14.7%
13.2%
14.6%
20.7%
24.5%
4.7%
-7.3%
-24.5%
-19.3%
14.0%
-9.6%
-6.2%
3.8%
32.4%
13.6%
15.3%
63.1%
45.0%
28.9%
53.7%
18.5%
11.4%
52.5%
97.5%
161.6%
142.8%
70.3%
15.5%
15.0%
25.9%
27.5%
30.4%
15.0%
15.0%
14.0%
14.6%
14.6%
13.0%
15.0%
15.7%
16.6%
16.6%
Source: Company data, HSBC estimates
1Q15 results
Revenue grew 10.5% y-o-y in 1Q15, outperforming peers. Reported net profit grew by 31.6% y-o-y to
RMB3,342m in 1Q15, while reported core profit grew by 4.5% y-o-y and reported core profit, including
gains and losses from hedging activities, was up 42.2% y-o-y. In 1Q15, air conditioners, refrigerators and
washing machines showed robust growth of 10%, 37% and 27%, respectively. Domestic air conditioner
sales and commercial air conditioners delivered strong growth of 18% and 23%. This strong growth in
large appliances was driven by a recovery in the growth of its distribution channel and growing consumer
awareness of the Midea brand.
GPM reached record higher thanks to an improved product mix and declining raw material costs.
The overall GPM expanded by 1.5ppt y-o-y to a record-high 26.9% in 1Q15, while the GPM for air
conditioners expanded by 3.4ppt y-o-y. The GPM expansion was thanks to declining raw materials and a
better product mix.
EBIT declined on high selling expenses, but provisions provide an ample buffer for profits. Midea’s
EBT declined by 2.2% as its selling expenses grew by 44.5% in 1Q15 and contribution margin was flat y-
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o-y. It increased spending on channel subsidies amid the ongoing price war in the air conditioner market
and raised provisions on sales rebates. Its end-1Q15 balance of other current liabilities, the majority of
which are sales rebate provisions, grew by 12% vs the end of 2104 and 58% y-o-y. Sales rebate
provisions at the end of December was 1.3 times as much as 2014 profit, providing an ample buffer to
protect profit growth should the company decide write back the provisions.
Valuation and risks
Our DCF approach combines our earnings model and EBITDA estimates with our assumptions on
depreciation, working capital, taxes and debt levels. We explicitly estimate minority interest EBITDA and
then strip this out of consolidated operating earnings. We model cash flows and EBITDA explicitly up to
2017, after which we build in semi-explicit cash flow estimates running off a sales growth assumption
and a profitability metric through to 2025. After this stage, we move to a terminal valuation phase. Our
DCF assumptions include a 5.5% China equity risk premium and a 0% terminal growth rate. Midea has a
6% cost of debt and a target 10:90 debt-to-equity ratio. Its company-specific beta is 1.00, yielding a 9.0%
cost of equity and hence a cost of capital of 8.6%.
We have assumed maintenance capex of RMB800m along with a 0.5% EBIT margin decline each year
for the semi explicit forecast period.
Based on these assumptions, our DCF-based fair value target price is RMB46.9, implying 22% upside against
the 2 June closing price. We initiate coverage of this stock with a Buy rating.
Our fair value target price implies PE multiples of 14x on 2015e EPS and 12.1x on 2016e EPS, and a 0.8x
PEG on our estimated 2014-17e profit CAGR of 19.4%.
Catalysts: better-than-expected GPM; pick-up in white goods sales; major developments in industrial
upgrades.
Key downside risks: faster-than-expected rise in selling expenses due to price wars; slower-thanexpected air conditioner sales due to a cool summer.
Figure 109. Midea PE Band Chart
45
40
35
30
25
20
15
10
5
0
Sep-13
Figure 110. Midea PB Band Chart vs. ROE
50
3.5x
12.0x
10.0x
8.0x
40
30%
3.0x
30
6.0x
4.0x
20
10
Jan-14
Price
8.0x
May-14
Sep-14
4.0x
10.0x
Source: Thomson Reuters Datastream, HSBC Estimates
Jan-15
May-15
6.0x
12.0x
0
Sep-13
40%
Jan-14
May-14
Sep-14
Price
2.5x
2.0x
20%
1.5x
10%
Jan-15
0%
May-15
ROE (RHS)
Source: Thomson Reuters Datastream, HSBC Estimates
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Gree (000651 CH)
 We forecast Gree to deliver a 10% CAGR in revenue and a 17.5%
CAGR in net profit is 2014-17e
 Most leveraged to a cyclical rebound in 2H15; potential beneficiary
of SOE reform
 Initiate with a Buy rating and a DCF-based fair value target price
of RMB77.2
Company description
Gree Electric Appliances was founded in 1989 and is based in Zhuhai, Guangdong. The company was
formerly known as Haili Air-conditioning Engineering Co., Ltd. of Zhuhai and changed its name to Gree
Electric Appliances, Inc. of Zhuhai in 1994. In 2014, the group’s sales reached RMB140bn with air
conditioner, small appliances, other industrial and financial business accounting for 85%, 1% and 14% of
total sales, respectively. The brands owned by Gree include “Gree”, “TOSOT” and “Kinghome”. It has a
national network of more than 30,000 POS for air conditioners through 27 distributors’ sales offices.
Under its main business, 11% are exports to the international market but only 30% of export volume is
under its own brands.
90% of Gree’s air conditioner sales are from residential air conditioners, including wall-mounted, floor
standing, window, and portable air conditioners. The remaining 10% are commercial air conditioners.
Industrial products include valves, pumps, compressors, fan motors, packaging and other general-purpose
equipment, electric motors, equipment for power transmission and distribution, control equipment, electric
wires and cables, optical cables and electrical equipment, capacitors, varnished wires and moulds.
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Shareholding structure
In 1991, Gree was restructured into Zhuhai Gree Electronics Holding Limited. In 1996, Gree listed on the
Shenzhen Stock Exchange under stock code 000651 CH.
In March 2006, Gree completed non-tradable share reform and all of its shares became tradable.
Gree’s controlling shareholder is Gree Group, which held a 19.16% stake in Gree as at end-2014.
In 2007, a total of 80m shares, or about 10% of the total shares outstanding, were transferred to Hebei
Jinghai from Gree Group. The shareholders of Hebei Jinghai are its top 10 distributors, accounting for
more than 65% of its domestic sales. As at end-2014, these key distributors held a 9.09% stake in Gree.
Management only had a 0.94% direct share investment in Gree as at end-2014.
Figure 111. Gree shareholder structure
Zhuhai SASAC
Key distributors
100%
Management
Pubic
Gree Group
51.94%
Gree Property Limited
100%
Zhuhai Gree Property
Limited
18.22%
19.16%
0.94%
9.09%
0.94%
70.81%
Gree (000651.SZ)
Source: Company data, HSBC
Potential SOE reform
Zhuhai SASAC, Gree’s ultimate controlling parent, is implementing corporate restructuring in line with SOE
reform. Gree Group, the direct parent of the listed Gree company, is an integral part of Zhuhai SASAC’s
restructuring.
According to an announcement by the listed Gree on 18 February 2014, in the first stage of restructuring, Gree
Group will transfer its 51.94% stake in Gree Property at zero consideration to a platform company set up for
SOE reform by Zhuhai SASAC. After the asset injection, the shareholding structure, Zhuhai SASAC will own
the SOE platform company, which will own Gree Property, whereas Zhuhai SASAC previously directly
owned Gree Property. The SOE platform company will be injected with other assets owned by Zhuhai SASAC,
including a 100% stake in Zhuhai Gree Hong Kong and Macau Bridge Project Management Company.
In the second phase of restructuring, once the asset transfer is completed, a strategic investor will be
sought for Gree Group through the disposal of the 49% stake in Gree Group owned by Zhuhai SASAC.
After the restructuring, Gree Group’s only major asset will be its 18.22% stake in the listed Gree
company.
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While there has yet to be any major progress on SOE reform at Gree Group, we believe the planned
restructuring will happen and that it will directly benefit the listed Gree in terms of improving
management incentives, potentially triggering a rerating in the stock.
These benefits are already becoming visible. At its 2014 annual general meeting (AGM) on 1 June 2015,
Gree elected a new board of directors. The new board has nine members and three of them are
independent directors. Mr. Ye Zhixiong occupies one board seat nominated by Zhuhai SASAC. He has
strong connections to Gree, as he previously worked as the chairman and party head at Gree Group from
May 2004 to August 2006. We believe he could help strengthen collaboration between Gree Group and
Zhuhai SASAC to drive SOE reform.
Sales and distribution
Gree’s sales and distribution have evolved through four distinct phases of development.
In the first phase, during 1995-97, Gree divided its distribution network by region and each region only
had one first-tier of distributors. Gree directly managed its first-tier distributors, while its first-tier
distributors helped manage sub-distributors. In this phase, Gree helped its first-tier distributors to grow in
scale and profits.
In the second phase, during 1998-99, Gree started to introduce more than one first-tier distributor to each
region in order to reduce the bargaining power of distributors. In this phase, it also tried to increase
control over distributors by using bar codes to control the inventory by regions and cooperating with
distributors to maintain stable retail prices by regions. Under stage two, it effectively eliminated the risks
of having only one distributor in one region.
In the third phase, during 2000-12, after Gree had successfully developed its national network coverage
by incubating large tier-one distributors, the company found the distribution model lacked support for
small sub-distributors and did not have a direct link to the end retail POS. Thus, in the third three phase,
Gree allowed its major distributors to set up one regional sales office in each region. Under this regional
sales office management structure, the major distributors have to collaborate on sales and marketing
activities, rather than implement sales and marketing independently for the benefit of their own bottom
line. Gree can also provide direct support to sub-distributors through regional sales offices. The model
enhanced Gree’s control on its distribution channel and improved efficiency.
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Figure 112. Gree distributorship (1995-2012)
Gree
(1995-1997)
Gree
(1998-1999)
Tier 1 distributor
Tier 1
distributor a
Tier 1
distributor b
Gree
(2000-2012)
Regional Sales Offices
Tier 2
distributor a
Tier 2
distributor b
Tier 2
distributor a
Tier 2
distributor b
Big
distributor a
Big
distributor b
….
…
….
….
Small
distributor a
Small
distributor b
…
Tier 2
distributor n
….
Tier 2
distributor n
Big
distributor n
Small
distributor n
One Tier 1 per region
Multiple Tier 1 per region
Regional Sales Offices
Source: Company data, HSBC
In the fourth phase since 2013, Gree started to centralize and further tighten its control on distributors
through the establishment of the sales company Shengshi Hengxi. Under this model, Gree used a ‘higher
GPM, higher cost model’ to control distributors’ profits and maximize its leverage on distributors’
working capital. As a result, Gree’s GPM expanded from 26.6% in 2012 to 36.6% in 2014, while its
selling and distribution expenses grew at a 41% CAGR on the back of an 18% sales CAGR during the
same period. Although Gree was already the market leader in air conditioners, it was able to outpace
market growth by leveraging its distributors’ working capital. During the same period (2012-14), its net
profit grew at a 38% CAGR and net margin improved to 10% in 2014 from 7.4% in 2012.
Investment thesis
Higher earnings visibility
We forecast Gree to deliver a 10% CAGR in revenue and 17.5% CAGR in net profit over 2014-17e. As
the No 1 air conditioner maker with a 28% market share, Gree has strong control over its profitability.
Despite the air conditioner price war since 4Q14, Gree has a large profit buffer that should enable it to
continue to deliver earnings growth. Its leverage on distributors’ working capital reached the maximum
level in 2H14, as channel inventory amounted to 40m units for the whole industry. To help its distributors
destock, it reversed its ‘high GPM, high selling expenses’ distribution strategies, so that it no longer
needs to take as much sales rebate provisions under selling expenses as before, more than offsetting the
GPM pressure from lower selling prices. Its balance of sales rebate provisions at the end of 2014 were
equal to more than three years of net profits.
Most leveraged to a cyclical rebound in 2H15
More than 90% of Gree’s earnings are from air conditioner sales. The air conditioner cycle is linked to the
property cycle and can be very volatile due to the destocking inventory cycle created by the mismatching
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of demand and supply, and pre-orders with one year’s lead time. Therefore, we believe Gree offers the
highest earnings leverage among peers to the property driven cyclical recovery from 4Q15.
Potential beneficiary of SOE reform
Gree lags the other two major Chinese white goods makers in terms of effective management incentive
plans and execution of strategies relating to e-commerce, smart appliances and Industry 4.0. However,
this could soon change through SOE reform. We have seen from the cases of Qingdao Haier and Midea
how a strategic partner or group restructuring can help improve management incentives, align
management and minority shareholders’ interests and result in strategic investments. As a result, we
believe Gree has the potential to improve through SOE reform.
Earnings estimates
Our earnings forecasts are largely derived from our estimates of revenue, gross margins, selling and
administrative (operating) costs, and net finance income. In the normal course of business, Gree hedges
its exposure to foreign currency and raw material price fluctuations through futures and forward contracts.
We do not attempt to model the marked-to-market gains and losses from these hedging activities, but note
they can have a meaningful impact the company’s reported earnings.
Revenue
Gree’s main products are air conditioners, accounting for 84.8% of total revenue and 86.2% of product sales
revenue in 2014. We forecast Gree to deliver a 10.3% revenue CAGR in 2014-17e and 7.7% y-o-y revenue
growth in 2015e. We estimate the revenue growth in air conditioners would be 5.3% in 2015e.
We forecast the revenue from air conditioners based on our estimates of volume market and ASP. We
forecast air conditioner revenue to grow by 5.3% y-o-y in 2015e.
Figure 113: Gree air conditioner forecasts (RMBm)
Air conditioner forecasts
Sales from Air Conditioners
y-o-y %
Total Volume ('000 unit)
y-o-y %
Total ASP
y-o-y %
Domestic air conditioner
- Sales volume ('000 unit): IOL
y-o-y %
- Gree market share (%): IOL
Export air conditioner
- Sales volume ('000 unit): IOL
y-o-y %
- Gree market share (%): IOL
2014a
2015e
2016e
2017e CAGR (2014-17e)
118,719
12.5%
39,504
2.1%
3,005
10.3%
125,035
5.3%
43,168
9.3%
2,896
-3.6%
136,394
9.1%
45,963
6.5%
2,968
2.5%
148,804
9.1%
48,950
6.5%
3,040
2.4%
7.8%
30,288
10.4%
43.3%
33,676
11.2%
45.3%
36,185
7.5%
45.8%
38,880
7.4%
46.3%
8.7%
9,216
-18.2%
19.7%
9,492
3.0%
19.7%
9,777
3.0%
19.7%
10,071
3.0%
19.7%
3.0%
7.4%
0.4%
Source: Company data, IOL, HSBC estimates
Industry products accounted 1.6% of Gree’s revenue in 2014. We estimate industry product revenues to
grow by 25% in 2015e and 25% CAGR over 2014-17e.
Small appliances accounted 1.3% of Gree’s revenue in 2014. We estimate small appliances revenue to
grow by 10% in 2015e and 10% CAGR over 2014-17e.
We forecast the total revenue of the group to grow by 7.7% in 2015e and at a 10.3% CAGR in 2014-17e.
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Figure 114. Gree revenue breakdown
2017e
2016e
2015e
2014
79.3%
81.2%
82.9%
84.8%
Figure 115. Gree gross profit breakdown
1.3% 2.3%
15.6% 1.5%
1.3%2.1%
14.0% 1.5%
1.3%1.9%
12.4% 1.5%
2016e
1.3% 1.6%
10.7% 1.6%
0
50
100
150
Air conditioners
Small appliances
Industrial products
Other product sales
Income from financial services
Source: Company data, HSBC estimates
2017e
200
90.3%
90.9%
2015e
91.2%
2014
92.1%
0.8% 1.0%
5.0% 2.8%
0.8%0.9%
4.5% 2.8%
0.9% 0.8%
4.2% 2.9%
0.8% 0.7%
3.4% 3.0%
0
20
40
60
Air conditioners
Small appliances
Industrial products
Other product sales
Income from financial services
80
Source: Company data, HSBC estimates
Gross profit margin
The cyclical drivers for GPM are:
 Fluctuations in raw materials costs: raw materials accounted for 75% of COGS in 2014
 Price wars: would lower the selling prices and thus GPM
 Currency fluctuations: RMB appreciation could lower FOB export prices and thus export GPM
The structural drivers for GPM are:
 ASP and product mix: a greater sales contribution from high-end / new products increases GPM
 Cost optimisation: automation, factory utilisation rates, manufacturing cost optimisation will
gradually improve GPM
 Regional mix: the share of exports in total sales; more exports lead to a lower blended GPM. Exports
were 11% of core business sales in 2014, and we expect the ratio to remain stable.
We forecast Gree’s overall GPM to shrink by 220bp to 34.4% in 2015e, mainly due to the decline in the GPM
of air conditioners by 2ppt y-o-y to 37.8% due to the price war in air conditioners that began in 4Q14.
Stripping out marketing and selling expenses, we expect the contribution margin to expand by 46bp to
16.4% in 2015e from 16.0% in 2014. As discussed earlier, Gree started to reverse its ‘high GPM, high
selling expenses’ strategies in 4Q14 and we expect it to lead to a 6.5% y-o-y decline in marketing and
selling expenses in 2015e, which should protect the company’s profit growth and relieve the working
capital pressure on its distributors. We expect gross profit to grow 1.1% in 2015e.
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Figure 116. Gross profit margin
Overall GPM
Air conditioners
Small appliances
Industrial products
Others products
Financial Services
Contribution margin
1H14a
2H14a
2014a
2015e
2016e
2017e
33.8%
35.6%
25.9%
14.2%
14.6%
68.3%
17.0%
38.6%
42.9%
20.0%
15.6%
9.6%
68.7%
15.2%
36.6%
39.8%
23.3%
15.2%
11.5%
68.5%
16.0%
34.4%
37.8%
23.3%
15.2%
11.5%
68.5%
16.4%
35.5%
39.8%
23.3%
15.2%
11.5%
68.5%
16.7%
35.8%
40.8%
23.3%
15.2%
11.5%
68.5%
17.0%
Source: Company data, HSBC estimates
Selling, general and administrative expenses
Total SGA was equal to 24.1% of the company’s net revenue in 2014. We expect marketing and selling
expenses to decrease by 6.5% in 2015e and admin expenses to increase by 3%, along with 1.1% growth
in gross profit and 7.7% growth in revenue. We forecast total SGA to decline by 5.1% y-o-y in 2015e and
increase at a 6.6% CAGR in 2014-17e.
We expect the SGA cost to sales ratio to go down to 21.2% in 2015e from 24.1% in 2014, mainly due to
the decline in marketing and selling expenses.
Figure 117. Expense ratios vs contribution margin
25%
18.8%
20%
20.6%
17.9%
18.8%
18.8%
14.6%
15%
10%
5%
12.0%
16.0%
16.4%
16.7%
17.0%
13.9%
4.1%
4.2%
3.4%
3.3%
3.1%
2.9%
2012
2013
2014
2015e
2016e
2017e
0%
Selling & Distribution expense to Sales ratio
Admin Expense to Sales ratio
Contribution Margin
Source: Company data, HSBC estimates
Operating profit
Based on the above revenue, GPM and SGA forecasts, we expect a 14.4% CAGR in EBIT over 201417e. We expect EBIT to increase by 9.9% to RMB18,549m in 2015e, with a 20bp increase in EBIT
margin to 12.3%, and sales growing 7.7% y-o-y to RMB150.8bn.
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Figure 118. Operating profit
40,000
35,000
RMBm
25,000
25,255
9.4%
18,549
16,884
15,000
11,271
8,136
9.9%
12%
6%
49.8%
4%
38.5%
5,000
14%
8%
16.1%
17.2%
16%
10%
21,748
8.1%
20,000
10,000
12.3%
12.1%
30,000
13.5%
12.9%
2%
0
0%
2012
2013
2014
2015e
EBIT
2016e
2017e
EBIT margin
Source: Company data, HSBC estimates
Net finance income
As discussed later in the cash flow analysis, Gree generates strong cash flows from its operations. Its net
cash amounted to RMB46,540m as at end-2014. We forecast net interest income at RMB1,083m,
RMB1,403m and RMB1,941m in 2015e, 2016e and 2017e, respectively.
Figure 119. Net finance income (RMBm)
Interest Income
Cash Balance
Interest Income Rate
Interest Cost
Gross Debt Balance
Interest Cost Rate
Net Interest Income
2013a
2014a
2015e
2016e
2017e
835
38,542
2.2%
-227
5,616
4.0%
608
1,250
54,546
2.3%
-228
8,006
2.9%
1,021
1,364
70,164
1.9%
-280
9,477
3.0%
1,083
1,754
94,470
1.9%
-351
11,377
3.1%
1,403
2,362
122,782
1.9%
-421
13,445
3.1%
1,941
Source: Company data, HSBC estimates
Net profit and net profit margin
Factoring in the dividend payout ratio for minority shareholders and effective tax rate, we forecast net
profit to grow 17.2% y-o-y to RMB16,589m in 2015e from RMB14,155m in 2014 and at a CAGR of
17.5% over the 2014-17e period on the 10.3% CAGR that we forecast in revenue. Our 2015 net profit
forecast is more or less in line with consensus (0.2% higher).
The company’s net margin in 2014 was 10.1%. With the expected increase in net profit in 2015, the net
margin could expand by 90bp to 11.0% in the same year.
However, there are three ways in which we can gauge Gree’s profit growth. The first is based on the
standard approach used by HSBC to assess the core profit of Hong Kong listed stocks, stripping out all
non-operational gains and losses. The second is reported core profit, which is the company’s own
measure of core profit, and usually includes some financial gains and losses (but excluding any mark-tomarket gains and losses from hedging activities) that would be considered non-core by HSBC. The third
is reported core earnings plus mark-to-market gains and losses from hedging activities; some investors
believe hedging activities should be considered part of the company’s recurring earnings.
Our net profit forecasts do not include non-core and non-recurring items.
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Figure 120. HSBC estimates vs. consensus
RMBm
________________ 2015e ________________
_______________ 2016e _______________
HSBC estimates
Consensus
% diff
HSBC estimates Consensus % diff
Total revenue
Operating profit
Profit
150,785
18,549
16,589
157,065
19,031
16,553
-4.0%
-2.5%
0.2%
167,984
21,748
19,562
_____________ 2017e ______________
HSBC estimates Consensus % diff
176,286 -4.7%
22,068 -1.4%
19,247 1.6%
187,636
25,255
22,979
Source: Thomson Reuters Datastream, HSBC estimates
Cash flows
We derive our cash flow forecasts based on working capital forecasts, capex forecasts, and dividend payout.
Gree had 89.8 working capital days in 2014, which steadily increase to 116 days by 2017e, assuming
stable inventory days but slower working capital cycles.
Figure 121. Working capital
Inventory Turnover Days
Raw material
Trade + Bills Receivable Days
Trade + Bills+ Deferred rev Payable Days
Working Capital Days(Working Capital*365/ COGs)
2013a
2014a
2015e
2016e
2017e
59.6
29.9
146.4
216.4
61.8
35.7
18.3
138.5
166.3
89.8
46.1
28.0
146.9
163.3
106.7
46.1
28.0
146.9
161.3
112.8
46.1
28.0
146.9
159.1
115.9
Source: Company data, HSBC estimates
We forecast capex at RMB1.5bn annually in 2015-17e.
Gree’s dividend payout was 41.5% in 2013 and 63.7% in 2014. We forecast the dividend payout ratio at
50% going forward.
We estimate its net cash position products will increase to RMB123bn by the end of 2017e from
RMB54.5bn as at the end of 2014.
We estimate net cash to increase to RMB60.7bn by the end of 2015e from RMB46.5bn at the end of
2014, after annual capex of RMB1.5bn.
Figure 122. Cash flows (RMBm)
Net cash from operating activities
Net cash from investing activities
Capex
Net cash from financing activities
Net increase in cash
Cash at beginning of year
Cash at end of year
(Net Debt) /Net Cash
As % of Equity
Source: Company data, HSBC estimates
72
2013a
2014a
2015e
2016e
2017e
12,970
-2,186
-2,461
-2,424
8,360
21,370
38,542
32,926
93%
18,939
-2,862
-1,777
-1,864
14,213
29,259
54,546
46,540
103%
23,941
-1,500
-1,500
-6,823
15,618
54,546
70,164
60,687
114%
33,687
-1,500
-1,500
-7,881
24,306
70,164
94,470
83,093
131%
39,234
-1,500
-1,500
-9,421
28,312
94,470
122,782
109,337
146%
198,651
25,337
22,065
-6%
0%
4%
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June 2015
Figure 123. Gree earnings estimate summary
(RMBm) Year ended 31 December
2010a
2011a
2012a
2013a
2014a
2015e
2016e
2017e
Sales
Gross profit
Total operating expenses
Selling & distribution expenses
Admin expenses
EBIT
Net Interest Income
PBT
Net income (loss)
HSBC Net income (loss)
Reported Core income (loss)
Margins
Overall GPM
SGA / Revenue ratio
S&D
Admin
OPM
PBT margin
Reported Net margin
HSBC Net Margin
Reported Core Margin
y-o-y %
Revenue
GP
Selling & distribution expenses
Admin expenses
OP
PBT
Reported Net profit
HSBC Net Income
Reported Core Profit
60,807
13,333
-10,388
-8,410
-1,978
4,650
333
5,056
4,276
4,203
4,027
83,517
15,367
-10,834
-8,050
-2,783
5,856
294
6,329
5,237
5,059
5,109
100,110
26,676
-18,682
-14,626
-4,056
8,136
511
8,763
7,380
7,264
6,995
120,043
39,165
-27,599
-22,509
-5,090
11,271
608
12,892
10,871
9,857
8,908
140,005
51,273
-33,708
-28,890
-4,818
16,884
1,021
16,752
14,155
15,154
14,145
150,785
51,826
-31,987
-27024
-4963
18,549
1,083
19,633
16,589
16,589
16,589
167,984
59,712
-36,855
-31644
-5211
21,748
1,403
23,152
19,562
19,562
19,562
187,636
67,194
-40,818
-35346
-5471
25,255
1,941
27,196
22,979
22,979
22,979
21.9%
-17.1%
13.8%
3.3%
7.6%
8.3%
7.0%
6.9%
6.6%
18.4%
-13.0%
9.6%
3.3%
7.0%
7.6%
6.3%
6.1%
6.1%
26.6%
-18.7%
14.6%
4.1%
8.1%
8.8%
7.4%
7.3%
7.0%
32.6%
-23.0%
18.8%
4.2%
9.4%
10.7%
9.1%
8.2%
7.4%
36.6%
-24.1%
20.6%
3.4%
12.1%
12.0%
10.1%
10.8%
10.1%
34.4%
-21.2%
17.9%
3.3%
12.3%
13.0%
11.0%
11.0%
11.0%
35.5%
-21.9%
18.8%
3.1%
12.9%
13.8%
11.6%
11.6%
11.6%
35.8%
-21.8%
18.8%
2.9%
13.5%
14.5%
12.2%
12.2%
12.2%
42.6%
25.0%
45.1%
26.3%
43.5%
49.6%
46.8%
45.6%
46.1%
37.3%
15.3%
-4.3%
40.7%
25.9%
25.2%
22.5%
20.4%
26.9%
19.9%
73.6%
81.7%
45.7%
38.9%
38.5%
40.9%
43.6%
36.9%
19.9%
46.8%
53.9%
25.5%
38.5%
47.1%
47.3%
35.7%
27.3%
16.6%
30.9%
28.3%
-5.3%
49.8%
29.9%
30.2%
53.7%
58.8%
7.7%
1.1%
-6.5%
3.0%
9.9%
17.2%
17.2%
9.5%
17.3%
11.4%
15.2%
17.1%
5.0%
17.2%
17.9%
17.9%
17.9%
17.9%
11.7%
12.5%
11.7%
5.0%
16.1%
17.5%
17.5%
17.5%
17.5%
Source: Company data, HSBC estimates
1Q15 results: Inventory destocking lowers GPM, but provisions
provide ample buffer for profits
Gree reported 1Q15 results. Its product revenue declined by 0.7% y-o-y to RMB24,504m (the last time
Gree recorded a sales decline was in 1H09, when its revenue dropped by 20%). EBIT dropped by 8% y-oy due to a 3.9% drop in contribution margin and increase in administration cost ratio. Its net profit grew
23% y-o-y to RMB2,775m in the quarter, reported core profit declined by 10% y-o-y and reported core
profit including hedging losses and gains grew 33% y-o-y.
GPM, and selling and distribution costs both declined. As discussed earlier, Gree adopted a ‘high GPM,
high selling costs’ model to control its channels and maximise leverage on distributors’ working capital.
Due to the slowdown in the property market and a cool summer in 2014, the air conditioner channel
inventory reached a peak of 40m units in 4Q14, equivalent to one-year of domestic sales volume,
according to CMM. To help distributors de-stock, Gree began cutting ex-factory prices aggressively in
4Q14. The results are reversing the ‘high GPM, high selling costs’ model, and lower selling and
distribution costs relating to sales rebates provisions. Consequently, in 1Q15, its GPM dropped by 2.5ppt
to 33% while its selling costs declined by 9.8% y-o-y. Its contribution margin declined by 3.9% y-o-y,
less than the 6.7% decline in gross profit.
Leading indicator, deferred revenue, grew q-o-q. Deferred revenue is a good leading indicator of
revenue growth. As the distributors’ working capital is tied up in the channel inventory, the deferred
revenue balance is set to decline or see slower growth. As at the end of 2014, its deferred revenue balance
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fell by 46% y-o-y. As at the end of 1Q15, the balance grew 35% q-o-q and declined 25% y-o-y, indicating
there was an improvement in the turnover in the channel.
Ample buffer for profits. Gree makes provisions on sales rebates, which act as a buffer for profits. As at
the end of 1Q15, its other current liabilities, the majority of which are sales rebate provisions, grew 51%
y-o-y and 4% q-o-q to RMB50,520. The balance is about 3.6x as large as Gree’s 2014 profit, which we
think provides an ample buffer to protect profit growth should the company decide to write back the
provisions.
Valuation and risks
Our DCF approach combines our earnings model and EBITDA estimates with our assumptions on
depreciation, working capital, taxes and debt levels. We explicitly estimate minority interest EBITDA and
then strip this out of consolidated operating earnings. We model cash flows and EBITDA explicitly up to
2017, after which we build in semi-explicit cash flow estimates running off a sales growth assumption
and a profitability metric through to 2025. After this stage, we move to a terminal valuation phase. Our
DCF assumptions include a 5.5% China equity risk premium and a 0% terminal growth rate. Gree has a
6% cost of debt and a target 10:90 debt-to-equity ratio. Its company-specific beta is 1.00, yielding a 9.0%
cost of equity and hence a cost of capital of 8.6%.
We have assumed maintenance capex of RMB800m along with a 0.5% EBIT margin decline each year
for the semi-explicit forecast period.
Based on these assumptions, our DCF-based fair value target price is RMB77.2, which implies 20%
upside against the 2 June closing price. As a result, we initiate coverage of the stock with a Buy rating.
Our fair value target price implies PE multiples of 13.8x on 2015e EPS and 11.6x on 2016e EPS and a
0.79x PEG on our forecast of a 17.5% CAGR in profit for 2014-17e.
Catalysts: an end to the price war in the air conditioner market; SOE reform; finding a strategic partner.
Downside risks: inventory issues persist; raw material price fluctuations; slower-than-expected progress
on SOE reform.
Figure 124. Gree PE band chart
Figure 125. Gree PB band chart vs ROE
70
10.5x
60
9.0x
50
7.5x
6.0x
40
30
4.5x
20
60
50
50%
2.5x
40%
40
2.0x
30
Jan-11
Jan-12
Jan-13
4.5x
9.0x
Source: Thomson Reuters Datastream, HSBC estimates
Jan-14
Jan-15
6.0x
10.5x
0
Jan-10
60%
3.0x
1.5x
30%
20%
10%
10
Price
7.5x
74
3.5x
20
10
0
Jan-10
70
0%
Jan-11
Jan-12
Price
Jan-13
Jan-14 Jan-15
ROE (RHS)
Source: Thomson Reuters Datastream, HSBC estimates
Consumer Brands & Retail
China – Equities
June 2015
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Qingdao Haier (600690 CH)
 We forecast Qingdao Haier to deliver a 9% CAGR in revenue and
a 15.7% CAGR in profit in 2014-17
 Better positioned to benefit from upgrade demand; asset injection
and the reduction of connected transactions with the parent to close
the profitability gap with peers; leader in Industry 4.0 development
 Initiate with a Buy rating and a DCF-based fair value target price
of RMB35.9
Company description
Thirty years ago, Haier was a small refrigerator maker that had gone with seemingly stagnant growth
prospects in Qingdao, a coastal city best known for Tsingtao beer. The Haier Group is now a respected
global brand and the world’s largest manufacturer of white goods that sells products in more than 100
countries. In 2012, Boston Consulting Group ranked the company the eighth most innovative firm in the
world.
Much of the success has been put down to Haier Group’s Chairman Zhang Ruimin who helped to turn the
company around in 1984 and has been there ever since. His latest innovation was to split the workforce
into 2,000 self-managed teams that perform a range of different roles and encourage employees to come
up with ideas for new products or services.
The Haier Group has two listed companies – Qingdao Haier (600690 CH), on which we initiate coverage
here with a Buy rating, and Haier Electronics (1169 HK, HKD23.15, Buy). The Haier Group and other
shareholders acting in concert hold a combined 40.9% stake in Qingdao Haier. Haier Group holds a 59.6%
interest in Haier Electronics through Qingdao Haier (46.5%) and Haier Investment and Development
(13.1%). Haier Electronics is fully consolidated into Qingdao Haier.
In 2014, Qingdao Haier’s revenue reached RMB88,775m, and sales from large appliances, small
appliances and integrated channel services (ICS) accounted for 68%, 7% and 20% of its revenue,
respectively. Out of its main businesses, 12% of sales are from exports to international markets, all under
its Haier brand or ODM.
Globally, Haier has 21 industry parks, 24 manufacturing factories, 10 R&D centres and 19 overseas
trading companies.
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Figure 126. Qingdao Haier brand portfolio
Source: Company data
Shareholder structure
Qingdao Haier was listed in November 1993 as a manufacturer of refrigerators under stock code 600690
CH. It started air conditioner manufacturing from 2001 by taking a controlling stake in Qingdao Haier Air
Conditioner Limited from its parent.
In May 2006, Qingdao Haier completed the non-tradable share reform and all its shares became tradable.
In 2010, it became the controlling shareholder of Haier Electronics (1169 HK) and thereby added
washing machines, water heater and integrated channel services (ICS) to its main businesses.
In 2011, it acquired modelling, special steel and other businesses from Haier Group by buying stakes in
10 companies.
On 30 September 2013, Qingdao Haier announced that KKR was coming on board as its strategic
investor through the issuance of new shares at RMB11.29 per share to the private equity company for
total proceeds of RMB3.4bn. After the new share issuance, KKR holds 9.95% in Qingdao Haier.
The controlling shareholder of Qingdao Haier is Haier Group, which in total holds a 40.91% stake
through its direct holding and holdings under Haier International and Qingdao Haier Investments, who are
shareholders acting in concert.
Haier Group is a collectively owned enterprise owned by management and staff, but the ownership titles
have yet to be confirmed for individual stakeholders. The core management team only has a 0.31% direct
stake in Qingdao Haier. The market has been concerned that management is not incentivised enough by
equity compensation. A future reform at the group level will likely change the situation.
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Figure 127. Qingdao Haier shareholder structure
Core
management
Public
Qingdao Haier
Group Asset
Management
Committee
Haier Group
KKR
51.94%
1.4%
Haier
International
Qingdao Haier Venture Capital
Investment Consulting
40.91%
17.61%
48.83%
0.31%
98.6%
Qingdao Haier
Investments
20.66%
2.64%
9.95%
Qingdao Haier (600690.SH)
Source: Company data
Investment thesis
Better positioned to benefit from the consumption upgrade
As discussed in the “White goods industry” chapter, the trend of consumers ‘trading up’ in terms of their
purchasing behaviour in China is a key secular industry driver. From improving on technology leadership
and product offering, the trend is for domestic brands to close the pricing gap with international brands.
The upgrade of domestic brands has been well-proven in the air conditioner industry. The average selling
price (ASP) gap between domestic brands and international brands was only 13%, the narrowest among
white goods categories. Moreover, in 2011-2014, the ASP of international brands declined by 3% and that
for domestic brand grew 9%.
We believe Qingdao Haier is better positioned to benefit from this trend with a higher end product
portfolio, more advanced technology and a stronger brand name.
Haier’s strong positioning in high-end white good products is demonstrated by its premium ASP vs.
domestic peers, especially for refrigerators.
Figure 128. Retail ASP of washing machines
Figure 129. Retail ASP of refrigerators
3,500
6,000
RMB
2,000
1,500
2,776
2,863
1,975
1,958
2,079
2,047
2,205
2,143
1,685
1,757
1,824
2,694
2,500
1,952
1,843
1,621
3,045
1,000
5,000
4,000
3,135
3,000
2,209
2,389
2,000
500
4,908
4,686
4,554
RMB
3,000
3,077
2,276
2,452
3,282
2,389
2,561
5,283
3,503
2,571
2,617
1,000
2011
International brands
2012
Domestic brands
2013
Haier
2014
2011
LittleSwan
International brands
Source: CMM
2012
Domestic brands
2013
2014
Haier
Midea
Source: CMM
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In terms of refrigerators, international brands’ ASP was at a 102% premium to domestic brands in 2014.
The gap was widened from that of 91% in 2011, as international brands’ ASP in 2014 grew 16% over that
in 2011, and growth in ASP of domestic brands was only 9.6% during the same period. In contrast,
Haier’s ASP premium to domestic brands widened to 34% from 31% in 2011, and it was able to grow its
ASP by 11.8% in 2011-14.
In terms of washing machines, international brands’ ASP was at a 67% premium to domestic brands in
2014, similar to that in 2011. Haier’s ASP attained a 21% premium to domestic ASP and a 3% premium
to Midea’s premium washing machine brand, Little Swan.
For water heaters, international brands’ ASP was at a 64% premium to domestic brands in 2014. Haier had a
10% premium to domestic brands’ ASP, while the Midea brand was at a 9% discount to domestic brands’ ASP.
For air conditioners, international brands’ ASP was at only a 13% premium to domestic brands in 2014.
In 2011-14, international brands’ ASP declined by 3% and that for domestic brands grew 9%. Gree, Haier,
and Midea brands are all at a premium to domestic brands’ ASP at 15%, 5% and 5%, respectively.
Figure 130. Retail ASP of air conditioners
Figure 131. Retail ASP of water heaters
3,000
5000
2,500
4500
4281
3975
3742
3552
3500
3000
3323
3294
2011
International brands
Source: CMM
4215
3964
3946
3749
3592
3488
3470
3593
4126
4060
3785
3780
3598
RMB
RMB
4203
4000
2,518
2,391
2,000
1,500
1,682
1,684
1,487
1,531
1,391
1,297
1,000
500
-
2012
Domestic brands
2013
Gree
2013
2014
Midea
International brands
Haier
2014
Domestic brands
Midea
Haier
Source: CMM
Asset injections from the parent to improve profitability
According to the agreement between Qingdao Haier and Haier Group, announced on 7 January 2011,
Haier Group promised to resolve the non-competition issue and reduce connected transactions with
Qingdao Haier by January 2016 (for details, see section “Group restructuring”).
By doing so, we believe Qingdao Haier can close its profitability gap with peers. As we analysed under the
section “Comparison analysis”, Qingdao Haier has a lower ROIC than Midea and Gree due to lower margins.
In 2014, Qingdao Haier acquired Haier Group’s R&D assets in China, and the minority interests of four
companies, including that of Qingdao Haier Air Conditioner Electronics. In 2011-13, Qingdao Haier
acquired from its parent the upstream white goods assets (modelling, special steel and new materials) and
overseas white goods assets.
In 2015, Haier’s parent plans to inject its overseas white goods assets, TV manufacturing and home
furnishing business, a 41% stake in Mitsubishi Qingdao Haier Air Conditioner JV and a stake in Carrier
Qingdao Haier Freeze Box JV into Qingdao Haier. (The announcement of the injection of overseas white
goods assets was made on 25 May 2015.)
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We estimate the net revenue accretion to Qingdao Haier will be about RMB10bn and the after tax profit
accretion will be around RMB350-400m.
Leader in moving to Industry 4.0
We believe Qingdao Haier is the sector leader in moving to Industry 4.0 through the digitalisation of its
production, distribution and services and has successfully integrated its research, product, logistics and
distribution platforms. We also believe strategic investor KKR will help quicken Haier’s steps to Industry
4.0. Its early-mover advantages are shown by:
 Diversified services income:
ICS, which provide distribution and logistics services to third parties, accounted for 19.6% of
Qingdao Haier revenue in 2014. The company has successfully integrated the distribution, services
and logistics networks under one ICS platform and opened it up to third parties.
 Digitalisation of sales:
In 2014, its online sales reached 8% of total revenue and 11% of domestic appliance sales after
growing 150% y-o-y.
 Smart factories:
As at the end of 1Q15, the company built four smart factories and 40 unmanned automatic production
lines. Its first smart factory was built in Shenyang in 2014 for the manufacturing of refrigerators. This
factory supports customisation of 500 SKUs on nine platforms.
 Smart appliances:
In 1Q15, Haier sold 500,000 units of smart refrigerators, washing machines, air conditioners and
water heaters, a 400% growth in volume y-o-y.
Group restructuring
Qingdao Haier was listed on the Shanghai Stock Exchange in 1993. In 2000, Haier Group conducted a
back-listing of Haier Electronics by injecting assets into a listed vehicle called CCT Telecom. In 2010,
Haier Group transferred the majority of its holding in Haier Electronics (1169 HK) to Qingdao Haier, and
the group positioned Qingdao Haier as its listing flagship for white goods and Haier Electronics as its
listing flagship for integrated channel services.
On 7 January 2011, Qingdao Haier and Haier Group reached and published an “agreement to resolve the
non-competition issue and reduce connected transactions between the parent and Qingdao Haier” and
planned to complete the followings by January 2016:
 The group will inject all overseas white goods assets into Qingdao Haier, including the group’s
investments in the JVs with Mitsubishi Heavy and Carrier.
 The group will inject all modelling, special steel and new materials assets into Qingdao Haier.
 The group will inject the overseas trading business into Qingdao Haier.
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 Connected procurement transactions between the group and Qingdao Haier will be reduced to below 30%.
 Group will inject TV, home furnishing and other related assets into Qingdao Haier.
Strategic investor KKR
On 30 September 2013, Qingdao Haier announced KKR would become its strategic investor via the issuance
of new shares at RMB11.29 per share to the private equity company for total proceeds of RMB3.4bn. After the
new share issuance, KKR holds 9.95% in Qingdao Haier with a lock-up of three years.
According to Haier’s announcements, KKR and Qingdao Haier are going to cooperate in the following
areas:
 Strategic positioning of the group, smart appliances, overseas business development, and mergers and
acquisitions
 Helping Haier to improve its incentive scheme and performance evaluation mechanism
 Optimising the group’s capital structure
 Further improving the operational efficiency of the group
As we showed in the chapter “New trends and new strategies”, Qingdao Haier is behind Midea in terms
of management shareholding, option plans and direct compensation. If KKR is able to help improve
management incentives, we believe more value can be unlocked for shareholders.
Sales and distribution
In terms of domestic sales, Qingdao Haier sells directly to third-party channels or its own sales offices
under Haier Electronics’ ICS. Its own sales network is managed under the ICS under Haier Electronics.
Haier Electronics’ ICS covers the specialty store channel and part of online sales, altogether accounting
for close to 70% of Qingdao Haier’s total sales. Third-party channels include national consumer
electronics chains, supermarket chains and other regional chain stores, covering close to 30% of its sales.
Qingdao Haier’s own sales & distribution network now has nine freight forward centres, 90 distribution
centres, 2m square meters of warehouses and storage areas, 7,600 country-level specialty stores, 26,000
township-level specialty stores, 190,000 village contact stations, and a logistics network that
includes17,000 service stations, which cover all 2,800 counties in China.
Under its own ICS, inventories are sold directly to its own sales offices, and its sales offices directly cover the
specialty stores. Sales offices offer an average credit term of 22 days to its franchisees. As Haier has a just-intime production model, it only carries about 19 days’ inventory in between its factories and the specialty stores.
By adding about 25 days’ inventory at the factory, Qingdao Haier has only 43 total inventory days in its supply
chain. It pays for the intersegment transaction to ICS at about 1.25% of goods value.
When Qingdao Haier sells into third-party national KA, like Gome and Suning, the company usually
gives them a credit term of two months.
In terms of export sales, Qingdao Haier has its own overseas sales and distribution network, and it pays
for connected transactions based on 1.5% of FOB prices.
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Earnings estimates
We derive our 2015-17e earnings by forecasting the revenue, gross margins, selling and administrative
operating costs, and net finance income respectively.
Revenue
Qingdao Haier has diversified revenue from white goods manufacturing to ICS. ICS accounted for 20%
of its revenue in 2014, and 75% of revenue was from white goods manufacturing. Qingdao Haier’s main
products are refrigerators, accounting for 28% of total revenue and 37% of white goods revenue in 2014.
Air conditioners, washing machines and small appliance accounted for 30%, 23% and 10% of its 2014
white goods revenue, respectively.
We forecast Qingdao Haier to deliver a 9.2% revenue CAGR in 2014-17 and 5.5% y-o-y revenue growth in
2015. We estimate the growth for white goods and ICS would be 8.7% and 9.2%, respectively, in 2015.
However, we expect equipment parts sales to decline by 45% y-o-y in 2015 as Qingdao Haier continues to
lower the connected transaction with its parent on parts procurement that started from 2H14. Equipment parts
sales accounted for 5% of its revenue in 2014 and we expect that to decline to 2% in 2015.
For white goods manufacturing, we forecast revenue using a bottom-up approach based on volume
market share and ASP growth. Refrigerator revenue in 2015 is forecasted to grow by 4.6% y-o-y, while
air conditioner and washing machine revenue should grow 12.6% and 4.9%, respectively. Our key
assumptions are summarised in Figure 133.
Figure 132. Qingdao Haier domestic sales breakdown by channels
Supermarkets
7%
Online
8%
KA
20%
Specialty
stores
65%
Source: HSBC estimates
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Figure 133. Qingdao Haier white goods appliance forecasts (RMBm)
Refrigerator forecasts
Sales from Refrigerators
y-o-y %
Total volume ('000 unit)
y-o-y %
Total ASP (RMB)
y-o-y %
Domestic Refrigerators
- Sales volume ('000 unit): IOL
y-o-y %
- Haier market share (%): IOL
Export Refrigerators
- Sales volume ('000 unit): IOL
y-o-y %
- Haier market share (%): IOL
Air Conditioner forecasts
Sales from Air Conditioners
y-o-y %
Total volume ('000 unit)
y-o-y %
Total ASP (RMB)
y-o-y %
Domestic Air Conditioners
- Sales volume ('000 unit): IOL
y-o-y %
- Haier market share (%): IOL
Export Air Conditioners
- Sales volume ('000 unit): IOL
y-o-y %
- Haier market share (%): IOL
Washing Machine forecasts
Sales from Washing Machines
y-o-y %
Total volume ('000 unit)
y-o-y %
Total ASP (RMB)
y-o-y %
Domestic Washing Machines
- Sales volume ('000 unit): IOL
y-o-y %
- Haier market share (%): IOL
Export Washing Machines
- Sales volume ('000 unit): IOL
y-o-y %
- Haier market share (%): IOL
Water Heater forecasts
Sales from Water Heaters
y-o-y %
Total volume ('000 unit)
y-o-y %
Total ASP (RMB)
y-o-y %
- Sales volume ('000 unit): IOL
y-o-y %
- Haier market share (%): IOL
2014a
2015e
2016e
2017e CAGR (2014-17e)
24,668
-2.6%
16,513
-1.5%
1,494
-1.1%
26,595
7.8%
17,285
4.7%
1,539
3.0%
28,403
6.8%
18,098
4.7%
1,569
2.0%
29,834
5.0%
18,636
3.0%
1,601
2.0%
52,981
-5.2%
28.6%
55,440
4.6%
28.6%
58,033
4.7%
28.6%
59,654
2.8%
28.6%
4.0%
23,307
11.0%
5.9%
24,473
5.0%
5.9%
25,696
5.0%
5.9%
26,981
5.0%
5.9%
5.0%
20,012
11.6%
9,392
10.5%
2,131
1.0%
22,529
12.6%
10,366
10.4%
2,173
2.0%
25,321
12.4%
11,423
10.2%
2,217
2.0%
28,416
12.2%
12,568
10.0%
2,261
2.0%
12.4%
70,010
12.3%
9.8%
74,401
6.3%
10.3%
79,072
6.3%
10.8%
84,042
6.3%
11.3%
6.3%
46,786
-4.1%
5.5%
48,189
3.0%
5.7%
49,635
3.0%
5.9%
51,124
3.0%
6.1%
3.0%
15,273
6.5%
14,677
6.0%
1,041
0.4%
16,020
4.9%
15,395
4.9%
1,041
0.0%
16,803
4.9%
16,148
4.9%
1,041
0.0%
17,624
4.9%
16,936
4.9%
1,041
0.0%
4.9%
38,528
2.2%
33.5%
40,154
4.2%
33.8%
41,848
4.2%
34.1%
43,613
4.2%
34.4%
4.2%
19,370
6.2%
9.2%
19,951
3.0%
9.2%
20,549
3.0%
9.2%
21,166
3.0%
9.2%
3.0%
4,534
4.2%
4,447
-11.5%
1,020
17.7%
25,865
-6.1%
17.2%
4,876
7.5%
4,688
5.4%
1,040
2.0%
27,112
4.8%
17.3%
5,228
7.2%
4,904
4.6%
1,066
2.5%
28,117
3.7%
17.4%
5,603
7.2%
5,128
4.6%
1,093
2.5%
29,151
3.7%
17.6%
7.3%
6.5%
4.1%
2.3%
10.2%
2.0%
4.9%
0.0%
4.9%
2.3%
4.1%
Source: Company data, IOL, HSBC estimates
Small appliances, including water heaters accounted for 7.2% of 2014 revenue, and non-heater appliances
accounted for only 2% of revenue. About 70% of the other appliances are kitchen wares, and we expect
other appliances to grow by 12.5%, 13% and 13.5% in 2015, 2016 and 2017, respectively.
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ICS, which accounted for 19.5% of total revenue in 2014, provides distribution and logistics services to
third parties. In 2014, about two-thirds of the ICS revenue was from the third-party (3P) ICS under Haier
Electronics, and the rest 3P ICS revenue was from assets or business owned by Qingdao Haier only. Since
2011, Qingdao Haier has gradually injected ICS assets into Haier Electronics, so we expect non-Haier
Electronics ICS revenue to decline by 15% per annum in our forecast period as the asset injection
continues. We expect 3P ICS from Haier Electronics to grow by 21%, 33% and 35% in 2015, 2016 and
2017, respectively (consistent with our estimates for Haier Electronics), as we expect its distribution
revenue to grow at an 11% CAGR in 2014-2017 and logistics revenue to grow at an 82% CAGR. Based
on the above assumptions, overall ICS revenue is expected to grow by 9.2% in 2015 and by 20.1% and
26.1% in 2016 and 2017.
The company’s equipment parts sales have has been declining since 2H11 as Qingdao Haier tries to
internalise its parts procurement by reducing connected transactions with its parent. Although the decline
in revenue has a minimal impact on the bottom line, the process should be completed in 2015 as it targets
to reduce connected transactions with the parent to below 30%. We expect equipment sales to further
decline by 45% in 2015 and then remain stable in 2016 and 2017.
Altogether, we estimate the total revenue of the company will rise to RMB93.7bn in 2015, up 5.5% y-o-y,
and growing at a 9.2% CAGR in 2014-17.
Figure 134. Qingdao Haier revenue breakdown
25.8%
2017
27.4%
2016
28.4%
2015
27.8%
2014
0
24.5%
24.1%
22.5%
20
15.3% 7.2%
24.6%
40
16.2% 7.4%
Figure 135. Qingdao Haier gross profit breakdown
29.6%
25%
22.1%
31.4%
2015
17.2% 7.3% 19.6%
60
30.8%
2016
17.1% 7.5% 20.3%
Refridgerator
Washing machine
ICS
Non-main business
32.4%
2014
80
100
120
140
Air conditioner
Water heater + small appliance
Equipment parts
Source: Company data, HSBC estimates
28.0%
2017
0
5
27.2%
19.1%
26.4%
24.9%
10
19.8%
20.7%
15
Refridgerator
Washing machine
ICS
Non-main business
10.9% 9.4%
18.4%
10.9%
7.8%
10.9% 6.8%
11.1% 5.0%
20
25
30
35
40
Air conditioner
Water heater + small appliance
Equipment parts
Source: Company data, HSBC estimates
Gross profit margin
The cyclical drivers for GPM are:
 Fluctuations in raw materials costs: raw materials accounted for 90% of COGS in 2014
 Price wars: these could lower selling prices and, therefore, GPM
 Currency fluctuations: RMB appreciation leads to a cut in FOB export prices and lower export GPM
The structural drivers for GPM are:
 ASP and product mix: a greater sales contribution from high-end/new products lift GPM
 Cost optimisation: automation, factory utilisation rates, manufacturing cost optimisation will
gradually improve GPM
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 Regional mix: the share of exports in total sales; more exports leads to a lower blended GPM.
Exports represented 12% of its core business sales in 2014
As discussed earlier, Qingdao Haier has a direct sales model in which it sells directly to its own sales
office, and its revenue is net of sales rebates to distributors/franchisees, so its GPM is good reflection off
the above factors. In contract, for Midea and Gree we should look at contribution margin, which is GPM
minus selling and marketing expenses by considering changes in the whole sales prices and promotion
subsidies paid to the distributor altogether. In Figure 136, we listed our keep assumptions for GPM.
We forecast the GPM of Qingdao Haier to expand by 237bp to 29.9% in 2015, mainly driven by declines
in raw material costs. As we estimated earlier in the chapter “2015: better 2H over 1H”, for every 10%
movement in the raw materials for air conditioners, refrigerators and washing machines, the GPM will on
average expand by 5-6 ppt. For the year to date, the blended average costs for making refrigerators, air
conditioners, washing machines and heaters have declined by 10%, 8%, 7% and 8%, respectively.
We expect equipment parts GPM to go up to 49.5% in 2015 as a result of a reduction in revenue under
connected transactions with the parent.
The gross profit of the company is expected to increase by 14.6% in FY15 to RMB27,993m from
RMB24,430m in 2014.
Looking at the contribution margin, we foresee most of the benefit of the GPM expansion to filter through
to the bottom line. We expect the contribution margin to expand by 190bp to 16.3% in 2015.
Figure 136. Gross profit margin
Gross Profit (RMBm)
y-o-y Growth
Overall GPM
Refrigerators
Air conditioners
Washing machines
Water heaters + small appliances
Integrated channel services
Equipment parts
2013a
2014a
2015e
2016e
2017e
21,945
24,430
11.32%
27.5%
32.1%
30.4%
33.2%
42.3%
7.0%
24.5%
27,993
14.58%
30.1%
33.1%
32.9%
34.7%
43.3%
10.0%
49.5%
30,864
10.26%
30.0%
33.5%
33.2%
35.2%
43.8%
10.5%
49.5%
34,009
10.19%
29.6%
33.8%
33.5%
35.5%
44.3%
11.0%
49.5%
25.3%
30.0%
28.5%
32.9%
41.5%
4.8%
14.6%
Source: Company data, HSBC estimates
Selling general and administrative
We forecast total SGA to grow 9.3% y-o-y in 2015 and at an 8.4% CAGR in 2014-17. We estimate
selling and distribution expenses to grow 11.0% y-o-y in 2015, with 14.6% growth in gross profit and
5.5% growth in revenue, and administrative expenses to grow by 6% y-o-y.
We expect the SGA cost-to-sales ratio to increase to 20.5% in 2015 from 19.8% in 2014.
From 2010 to 1H14, Qingdao Haier’s selling and distribution cost ratio has gradually declined, benefiting from
the lower cost enjoyed from its internal distribution channel. In June 2010, Haier lowered the sales margin
granted to its own sales companies to 1.75% from 2.25%, and it was further lowered to 1.25% in April 2011. In
terms of export, it pays its internal sales companies 1.5% on FOB prices.
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June 2015
In 2015, we expect the selling and distribution expenses ratio to go up because of: 1) the reduction in
revenue related to equipment parts; and 2) higher expenses on price wars on air conditioners, especially in
1H15. We expect the ratio to come down after 2015.
Figure 137. Expense ratios vs. contribution margin
18%
16%
14%
16.3%
16.2%
13.7%
13.5%
13.2%
13.2%
13.4%
12.1%
11.9%
6.5%
6.3%
6.8%
6.8%
6.5%
6.2%
2012
2013
2014
2015e
2016e
2017e
12%
10%
16.2%
14.5%
13.0%
8%
6%
4%
2%
0%
Selling and Distribution Expense to Sales ratio
Admin Expense to Sales Expense ratio
Contribution Margin
Source: Company data, HSBC estimates
Operating profit
Based on revenue, GPM and SGA forecasts, we expect EBIT to grow at a 19.5% 2014-17 CAGR. We
expect FY15 EBIT to increase by 29.1% to RMB8,491m with 166bp of expansion in the EBIT margin to
9.1% driven mostly by declining raw material costs.
Figure 138. Operating profit
12%
16,000
14,000
RMBm
10,000
10%
8%
14.6%
6,577
6%
15.3%
29.1%
12.6%
4,000
9,786
8,491
5,841
4,994
11,218
7.4%
6.7%
6.3%
8,000
6,000
9.5%
9.1%
12,000
9.7%
4%
16.8%
2%
2,000
0
0%
2012
2013
EBIT
2014
2015e
2016e
EBIT Margin (RHS)
2017e
Source: Company data, HSBC estimates
Net finance income
As discussed later in cash flow analysis, Qingdao Haier generates negative working capital inflows from
its operations with a negative working capital cycle. We forecast net interest income of RMB559,
RMB656 and RMB746 in 2015, 2016, and 2017, respectively.
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Consumer Brands & Retail
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June 2015
Figure 139. Net finance income (RMBm)
Interest income
Cash Balance
Interest Income Rate
Interest Cost
Gross Debt Balance
Interest Cost Rate
Net Interest Income
2013a
2014a
2015e
2016e
2017e
285
20,641
1.4%
-105
1,891
5.6%
179
540
28,644
1.9%
-129
2,809
4.6%
411
559
28,531
2.0%
-129
3,199
4.0%
430
656
32,413
2.0%
-147
3,651
4.0%
510
746
37,348
2.0%
-167
4,173
4.0%
578
Source: Company data, HSBC estimates
Net profit
Factoring in the dividend payout ratio for minority shareholders and the effective tax rate, we forecast net
profit to grow 16.5% y-o-y in 2015 to RMB5,770m from RMB4,992m in 2014. We expect net profit to
grow at a CAGR of 15.7% in 2014-17 with revenue rising at a 9.2% CAGR. We are more or less in line
with consensus on our 2015 net profit forecast (0.4% below).
However, there are two ways in which we can gauge its profit growth. The first is based on the standard
approach used by HSBC to assess the core profit of Hong Kong-listed stocks, stripping out all nonoperational gains and losses. The second is reported core profit, which is the company’s own measure of
core profit, and usually includes some financial gains and losses that would be considered non-core by
HSBC.
Our net profit forecasts do not include that for non-core and non-recurring items.
Figure 140. HSBC estimates vs. Consensus
RMBm
______________ 2015e ________________ ________________ 2016e _________________ _____________ 2017e ______________
HSBC estimates Consensus % diff
HSBC estimates Consensus
% diff
HSBC estimates Consensus % diff
Total revenue
Operating profit
Profit
93,669
8,491
5,770
97,256 -3.7%
8,269 2.7%
5,794 -0.4%
103,518
9,786
6,700
104,043
9,665
6,708
-0.5%
1.2%
-0.1%
Source: Thomson Reuters Datastream, HSBC estimates
Cash flows
We conduct our cash flow forecasts based on working capital forecasts, capex forecasts, and dividend
payout.
Our working capital forecasts assumptions are listed in Figure 141. Qingdao Haier has negative working
capital days of 14 days in 2014, which steadily shortened to 6 days in 2015 by assuming the price war in
the air conditioner market will prolong the working capital cycle.
86
115,541
11,218
7,729
112,393
10,504
7,827
3%
7%
-1%
abc
Consumer Brands & Retail
China – Equities
June 2015
Figure 141: Working Capital
Inventory Turnover Days
Raw materials
Trade + Bills Receivable Days
Trade + Bills+ Deferred rev Payable Days
Working Capital Days (Working Capital*365/ COGs)
2013a
2014a
2015e
2016e
2017e
39.0
15.2
84.5
166.0
-13.9
42.9
14.2
89.3
180.6
-14.4
42.9
14.2
89.8
182.8
-6.4
42.9
14.2
90.3
185.2
-7.2
42.9
14.2
90.8
187.5
-8.5
Source: Company data, HSBC estimates
We forecast RMB4bn capex in 2015 and RMB2.5bn annually in 2016 and 2017. Of the RMB4bn capex
we expect in 2015, we assume: 1) RMB2bn of investments in smart factories; 2) RMB1.2bn on Sinopec
marketing; and 3) the rest on investments in logistics and acquisitions.
Our capex forecasts do not consider acquisitions from its parent.
Qingdao Haier has a dividend policy of paying out more than 20% earnings. It consistently paid out 30%
each year in 2012-14. We forecast the dividend payout ratio to remain stable at 30% going forward.
As per our forecasts in Figure 142, we estimate its net cash position to increase to RMB33.1bn by the end
of 2017 from RMB25.8bn at the end of 2014.
Figure 142. Cash flows (RMBm)
Net cash from operating activities
Net cash from investing activities
- Capex
Net cash from financing activities
Net increase in cash
Cash at beginning of year
Cash at end of year
(Net Debt)/ Net Cash
as % of equity
2013a
2014a
2015e
2016e
2017e
6,511
-1,382
-1,757
-925
4,205
16,243
20,421
18,751
94%
7,007
-3,251
-2,005
4,359
8,115
20,421
28,539
25,835
89%
5,230
-4,000
-4,000
-1,343
-113
28,644
28,531
25,332
76%
7,941
-2,500
-2,500
-1,559
3,882
28,531
32,413
28,762
76%
9,233
-2,500
-2,500
-1,799
4,935
32,413
37,348
33,175
77%
Source: Company data, HSBC estimates
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Consumer Brands & Retail
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June 2015
Figure 142. Qingdao Haier earnings estimate summary
(RMBm) Year ended 31 December
Sales
Gross profit
Total operating expenses
- Selling & distribution expenses
- Admin expenses
EBIT
Net interest income
PBT
Net income (loss)
HSBC Net income (loss)
Reported Core Profit
Margins
Overall GPM
Contribution Margin
SGA / Revenue ratio
S&D
Admin
OPM
PBT margin
Net margin
HSBC Net Margin
Reported Core Margin
y-o-y %
Revenue
GP
Selling & distribution expenses
Admin expenses
OP
PBT
Reported Net profit
HSBC Net Income
Reported Core Profit
2010a
2011a
2012a
2013arestated
2014a
2015e
2016e
2017e
60,588
14,168
-11,232
-7,815
-3,417
3,446
74
3,707
2,029
1,823
1,643
73,663
17,399
-13,153
-9,099
-4,053
4,169
118
4,414
2,690
2,542
2,438
79,857
20,153
-14,818
-9,629
-5,189
4,994
122
5,428
3,269
2,922
3,177
86,606
21,945
-15,786
-10,307
-5,479
5,841
179
6,724
4,174
3,433
3,759
88,775
24,430
-17,573
-11,578
-5,995
6,577
411
8,047
4,992
3,870
4,324
93,669
27,993
-19,206
-12,852
-6,354
8,491
430
9,207
5,770
5,420
5,770
103,518
30,864
-20,744
-14,008
-6,736
9,786
510
10,582
6,700
6,350
6,700
115,541
34,009
-22,409
-15,269
-7,140
11,218
578
12,083
7,729
7,379
7,729
23.4%
10.5%
18.5%
12.9%
5.6%
5.7%
6.1%
3.3%
3.0%
2.7%
23.6%
11.3%
17.9%
12.4%
5.5%
5.7%
6.0%
3.7%
3.5%
3.3%
25.2%
13.2%
18.6%
12.1%
6.5%
6.3%
6.8%
4.1%
3.7%
4.0%
25.3%
13.4%
18.2%
11.9%
6.3%
6.7%
7.8%
4.8%
4.0%
4.3%
27.5%
14.5%
19.8%
13.0%
6.8%
7.4%
9.1%
5.6%
4.4%
4.9%
29.9%
16.2%
20.5%
13.7%
6.8%
9.1%
9.8%
6.2%
5.8%
6.2%
29.8%
16.3%
20.0%
13.5%
6.5%
9.5%
10.2%
6.5%
6.1%
6.5%
29.4%
16.2%
19.4%
13.2%
6.2%
9.7%
10.5%
6.7%
6.4%
6.7%
83.7%
62.5%
56.8%
61.5%
119.3%
113.0%
76.5%
79.3%
53.9%
21.6%
22.8%
16.4%
18.6%
21.0%
19.1%
32.6%
39.4%
48.4%
8.4%
15.8%
5.8%
28.0%
19.8%
23.0%
21.5%
15.0%
30.3%
NA
NA
NA
NA
NA
NA
NA
NA
NA
2.5%
11.3%
12.3%
9.4%
12.6%
19.7%
19.6%
12.7%
15.0%
5.5%
14.6%
11.0%
6.0%
29.1%
14.4%
15.6%
40.1%
33.4%
10.5%
10.3%
9.0%
6.0%
15.3%
14.9%
16.1%
17.2%
16.1%
11.6%
10.2%
9.0%
6.0%
14.6%
14.2%
15.4%
16.2%
15.4%
Source: Company data, HSBC estimates
1Q15 results
1Q15 sales growth recovered from 4Q14. Qingdao Haier recorded a 2.3% y-o-y decline in revenue,
representing an improvement from the 8.3% decline in 4Q14. On an adjusted basis, its 1Q15 revenue
grew above 2%. From the company disclosures of Haier Electronics, we note that washing machine and
heater sales grew 6.6% y-o-y in 1Q15, up from the 1% growth seen in 4Q14, and ICS growth picked up to
1.8% from the 4.3% decline seen in 4Q14. Its net profit grew 12.9% y-o-y and reported core net profit
grew 15.3%.
GPM expansion drove growth in EBIT. Thanks to a better product mix and declining raw material
costs, its GPM expanded by 2.9ppt to 27.7%, leading to a 9% gross in operating profit on flat revenue. Its
EBIT grew 12% y-o-y, thanks to effective cost control.
Smart appliances recorded fast growth. In 1Q15, Qingdao Haier sold 500,000 units of smart
appliances, including refrigerators, washing machines, air conditioners and water heaters. The volume
grew 400% y-o-y. Haier continues to make progress on the development of its U+ Smart System. The
company has enabled connectivity among devices through the U+ system; the next step is to facilitate
interaction between consumers and devices.
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June 2015
Valuation and risks
Our DCF approach combines our earnings model and EBITDA estimates with our assumptions on
depreciation, working capital, taxes and debt levels. We explicitly estimate minority interest EBITDA and
then strip this out of consolidated operating earnings. We model cash flows and EBITDA explicitly up to
2017, after which we build in semi-explicit cash flow estimates running off a sales growth assumption
and a profitability metric through to 2025. After this stage, we move to a terminal valuation phase. Our
DCF assumptions include a 5.5% China equity risk premium and a 0% terminal growth rate. Qingdao
Haier has a 6% cost of debt and a target 10:90 debt-to-equity ratio. Its company-specific beta is 0.90,
yielding 8.5% cost of equity and, therefore, a cost of capital of 8.1%.
We have assumed maintenance capex of RMB900m along with a 0.5% EBIT margin decline each year
for the semi-explicit forecast period.
Based on these assumptions, our DCF-based fair value target price is RMB35.9, implying 18% upside
against the 2 June closing price. We initiate coverage of the stock with a Buy rating.
Our fair value target price implies PE multiples of 18.4x on 2015e EPS and 16.3x on 2016e EPS, and a
1.2x PEG on our forecast of a 15.7% CAGR in profit for 2014-17e.
Catalysts: better-than-expected GPM; sales recovery in air conditioners; fast growth in the number of
users of its U+ smart appliance systems.
Key downside risks: raw material price fluctuations; faster-than-expected rise in operating costs.
Figure 144. Qingdao Haier PE Band Chart
Figure 145. Qingdao Haier PB Band Chart vs. ROE
50
35
30
16.0x
25
13.0x
20
10.0x
30
15
7.0x
10
20
4.0x
40
4.5x
3.5x
2.5x
1.5x
10
5
0
Jan-10
50%
40%
30%
20%
10%
0.5x
Jan-11
Price
10.0x
Jan-12
Jan-13 Jan-14
4.0x
13.0x
Source: Thomson Reuters Datastream, HSBC estimates
Jan-15
7.0x
16.0x
0
Jan-10
0%
Jan-11
Jan-12
Jan-13
Jan-14
Price
Jan-15
ROE (RHS)
Source: Thomson Reuters Datastream, HSBC estimates
89
abc
Consumer Brands & Retail
China – Equities
June 2015
Financials & valuation: Gree Electric Appliances
Financial statements
Year to
Key forecast drivers
12/2014a
12/2015e
12/2016e
12/2017e
Profit & loss summary (RMBm)
Revenue
EBITDA
Depreciation & amortisation
Operating profit/EBIT
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
140,005
18,241
-1,357
16,884
1,021
16,752
17,751
-2,499
14,155
15,154
150,785
20,029
-1,480
18,549
1,083
19,633
19,633
-2,929
16,589
16,589
167,984
23,364
-1,616
21,748
1,403
23,152
23,152
-3,454
19,562
19,562
187,636
27,014
-1,759
25,255
1,941
27,196
27,196
-4,058
22,979
22,979
20,931
-1,777
-2,862
-9,024
-14,859
3,713
23,942
-1,500
-1,500
-8,294
-14,040
8,802
33,687
-1,500
-1,500
-9,781
-22,406
15,276
39,234
-1,500
-1,500
-11,490
-26,244
18,604
Cash flow summary (RMBm)
Cash flow from operations
Capex
Cash flow from investment
Dividends
Change in net debt
FCF equity
Year to
12/2014a
12/2015e
12/2016e
12/2017e
0.13
0.10
0.37
0.22
0.05
0.10
0.34
-0.05
0.09
0.10
0.36
0.15
0.09
0.10
0.36
0.11
12/2014a
12/2015e
12/2016e
12/2017e
1.0
7.3
0.8
6.0
0.6
4.2
0.4
2.6
12.4
4.3
2.0
4.8
11.3
3.6
4.8
4.4
9.6
3.0
8.4
5.2
8.2
2.6
10.2
6.1
Air conditioners Growth Rate
Small appliances growth rate
Overall GPM
SGA growth rate
Valuation data
Year to
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Balance sheet summary (RMBm)
Intangible fixed assets
Tangible fixed assets
Current assets
Cash & others
Total assets
Operating liabilities
Gross debt
Net debt
Shareholders’ funds
Invested capital
Buy
4,630
16,702
120,143
54,546
156,231
104,788
5,838
-48,708
44,153
-17,859
4,549
16,803
147,222
70,164
183,330
122,015
7,416
-62,748
52,447
-23,605
4,468
16,768
179,628
94,470
215,620
142,624
9,316
-85,154
62,228
-36,230
4,387
16,590
217,388
122,782
253,121
166,567
11,384
-111,399
73,718
-50,984
Share price
(RMB)62.53
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price
000651.SZ
30,330
100
China
Lina Yan
2
3
.
5
(RMB)77.20
Bloomberg (Equity)
000651 CH
Market cap (RMBm)
188,082
Enterprise value (RMBm)
119,778
Sector
Household Durables
Contact
+852 2822 4344
Price relative
67
67
57
57
47
47
37
37
27
27
Ratio, growth and per share analysis
Year to
12/2014a
12/2015e
12/2016e
12/2017e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
16.6
45.9
49.8
29.9
53.7
7.7
9.8
9.9
17.2
9.5
11.4
16.7
17.2
17.9
17.9
11.7
15.6
16.1
17.5
17.5
-10.6
-109.7
38.5
10.0
13.0
12.1
-107.9
-2.7
-
-7.3
-76.5
34.3
10.0
13.3
12.3
-117.4
-3.1
-
-5.6
-62.1
34.1
10.0
13.9
12.9
-134.7
-3.6
-
-4.3
-49.4
33.8
10.0
14.4
13.5
-149.1
-4.1
-
4.71
5.04
3.00
14.68
5.52
5.52
2.76
17.44
6.50
6.50
3.25
20.69
7.64
7.64
3.82
24.51
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Operating profit margin
EBITDA/net interest (x)
Net debt/equity
Net debt/EBITDA (x)
CF from operations/net debt
Per share data (RMB)
EPS Rep (fully diluted)
HSBC EPS (fully diluted)
DPS
Book value
90
17
Jun-13
Dec-13
Jun-14
Dec-14
Gree Electric Appliances
Rel to SSE COMPOSITE INDEX
Source: HSBC
Note: price at close of 04 Jun 2015
17
Jun-15
abc
Consumer Brands & Retail
China – Equities
June 2015
Financials & valuation: Qingdao Haier Co Ltd
Financial statements
Year to
Key forecast drivers
12/2014a
12/2015e
12/2016e
12/2017e
Profit & loss summary (RMBm)
Revenue
EBITDA
Depreciation & amortisation
Operating profit/EBIT
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
88,775
7,360
-783
6,577
411
8,047
6,925
-1,354
4,992
3,870
93,669
9,343
-853
8,491
430
9,207
8,857
-1,522
5,770
5,420
103,518
10,735
-949
9,786
510
10,582
10,232
-1,718
6,700
6,350
115,541
12,266
-1,048
11,218
578
12,083
11,733
-1,925
7,729
7,379
Cash flow summary (RMBm)
Cash flow from operations
Capex
Cash flow from investment
Dividends
Change in net debt
FCF equity
Buy
7,007
-2,005
-3,251
-1,591
-7,084
4,739
5,230
-4,000
-4,000
-1,733
502
2,858
7,941
-2,500
-2,500
-2,012
-3,429
7,319
9,233
-2,500
-2,500
-2,321
-4,413
8,876
75
11,312
61,815
28,531
80,494
43,990
3,199
-25,332
25,499
754
75
12,940
69,385
32,413
89,615
47,970
3,651
-28,762
30,188
2,091
75
14,470
78,875
37,348
100,557
52,982
4,173
-33,175
35,596
3,164
Year to
12/2014a
12/2015e
12/2016e
12/2017e
-0.03
0.12
0.06
0.14
0.28
0.11
0.08
0.13
0.05
0.13
0.30
0.09
0.07
0.12
0.05
0.13
0.30
0.08
0.05
0.12
0.05
0.14
0.30
0.08
12/2014a
12/2015e
12/2016e
12/2017e
0.8
9.5
24.8
4.5
4.9
1.7
0.8
7.6
93.7
17.7
3.8
3.0
1.8
0.7
6.3
32.2
15.1
3.2
7.6
2.1
0.5
5.1
19.9
13.0
2.7
9.2
2.4
Refrigerator Growth Rate
Air conditioner Growth Rate
Washing machine Growth Rate
Small Appliances Growth Rate
Overall GPM
SGA Growth
Valuation data
Year to
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Note: * = Based on HSBC EPS (fully diluted)
Balance sheet summary (RMBm)
Intangible fixed assets
Tangible fixed assets
Current assets
Cash & others
Total assets
Operating liabilities
Gross debt
Net debt
Shareholders’ funds
Invested capital
75
8,087
59,475
28,644
75,006
42,930
2,809
-25,835
21,461
-3,863
Issuer information
Share price
(RMB)31.53
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price
600690.SS
15,488
100
China
Lina Yan
1
3
.
9
(RMB)35.90
Bloomberg (Equity)
600690 CH
Market cap (RMBm)
96,044
Enterprise value (RMBm)
70,699
Sector
Household Durables
Contact
+852 2822 4344
Price relative
Ratio, growth and per share analysis
Year to
12/2014a
12/2015e
12/2016e
12/2017e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
2.5
12.6
12.6
19.7
0.9
5.5
26.9
29.1
14.4
40.1
10.5
14.9
15.3
14.9
17.2
11.6
14.3
14.6
14.2
16.2
-24.8
-154.6
21.5
10.0
8.3
7.4
-89.9
-3.5
-
-60.3
-460.1
23.1
10.0
10.0
9.1
-77.3
-2.7
-
72.8
580.8
22.8
10.6
10.4
9.5
-76.8
-2.7
-
44.0
361.4
22.4
10.8
10.6
9.7
-77.4
-2.7
-
1.64
1.27
0.52
7.05
1.89
1.78
0.57
8.37
2.20
2.08
0.66
9.91
2.54
2.42
0.76
11.69
33
33
28
28
23
23
18
18
13
13
8
Jun-13
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Operating profit margin
EBITDA/net interest (x)
Net debt/equity
Net debt/EBITDA (x)
CF from operations/net debt
Dec-13
Qingdao Haier Co Ltd
Jun-14
Dec-14
Rel to SSE COMPOSITE INDEX
8
Jun-15
Source: HSBC
Note: price at close of 04 Jun 2015
Per share data (RMB)
EPS Rep (fully diluted)
HSBC EPS (fully diluted)
DPS
Book value
91
abc
Consumer Brands & Retail
China – Equities
June 2015
Financials & valuation: Midea Group Co Ltd
Financial statements
Year to
Key forecast drivers
12/2014a
12/2015e
12/2016e
12/2017e
Profit & loss summary (RMBm)
Revenue
EBITDA
Depreciation & amortisation
Operating profit/EBIT
Net interest
PBT
HSBC PBT
Taxation
Net profit
HSBC net profit
142,311
17,333
-3,320
14,012
165
13,991
13,991
-2,344
10,502
10,273
160,011
21,176
-3,536
17,640
522
17,980
17,980
-2,967
13,395
13,395
181,237
23,855
-3,747
20,108
677
20,604
20,604
-3,400
15,350
15,350
205,112
27,218
-3,953
23,265
931
24,014
24,014
-3,962
17,890
17,890
Cash flow summary (RMBm)
Cash flow from operations
Capex
Cash flow from investment
Dividends
Change in net debt
FCF equity
Buy
24,789
-2,678
-28,862
-4,216
4,733
24,932
19,369
-4,000
-4,000
-5,377
-9,992
17,169
22,851
-4,000
-4,000
-6,162
-12,690
20,887
25,389
-4,000
-4,000
-7,181
-14,207
23,732
6,161
21,609
98,364
16,671
132,694
75,062
3,762
-12,909
47,489
40,902
5,200
22,823
117,133
29,375
151,716
84,883
3,776
-25,598
56,677
37,400
4,239
23,832
134,370
39,806
169,000
95,234
0
-39,806
67,385
33,902
Year to
12/2014a
12/2015e
12/2016e
12/2017e
0.17
0.20
0.24
0.17
0.25
0.16
0.12
0.16
0.17
0.10
0.27
0.15
0.14
0.13
0.15
0.10
0.27
0.15
0.14
0.10
0.15
0.10
0.28
0.14
12/2014a
12/2015e
12/2016e
12/2017e
1.1
8.9
3.6
15.6
4.1
15.8
2.6
0.9
6.8
3.5
12.0
3.4
10.9
3.4
0.7
5.5
3.5
10.4
2.8
13.3
3.8
0.6
4.3
3.5
9.0
2.4
15.1
4.5
Air conditioners growth rate
Refrigerators growth rate
Washing machines growth rate
Small appliances growth rate
Overall GPM
SGA Growth Rate
Valuation data
Year to
EV/sales
EV/EBITDA
EV/IC
PE*
P/Book value
FCF yield (%)
Dividend yield (%)
Note: * = Based on HSBC EPS (fully diluted)
Balance sheet summary (RMBm)
Intangible fixed assets
Tangible fixed assets
Current assets
Cash & others
Total assets
Operating liabilities
Gross debt
Net debt
Shareholders’ funds
Invested capital
7,122
20,184
86,427
9,772
120,292
67,586
6,855
-2,917
39,470
42,876
Issuer information
Share price
(RMB)38.03
Reuters (Equity)
Market cap (USDm)
Free float (%)
Country
Analyst
Target price
000333.SZ
25,854
100
China
Lina Yan
2
3
.
3
(RMB)46.90
Bloomberg (Equity)
000333 CH
Market cap (RMBm)
160,327
Enterprise value (RMBm)
144,639
Sector
Household Durables
Contact
+852 2822 4344
Price relative
Ratio, growth and per share analysis
Year to
12/2014a
12/2015e
12/2016e
12/2017e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
17.4
41.7
52.5
39.7
4.6
12.4
22.2
25.9
28.5
30.4
13.3
12.6
14.0
14.6
14.6
13.2
14.1
15.7
16.6
16.6
3.7
32.6
28.4
10.9
12.2
9.8
-6.4
-0.2
-
3.8
37.1
30.8
12.0
13.2
11.0
-24.0
-0.6
-
4.6
44.9
29.5
12.2
13.2
11.1
-40.7
-1.1
-
5.8
56.7
28.8
12.6
13.3
11.3
-54.0
-1.5
-
2.49
2.44
1.00
9.36
3.18
3.18
1.28
11.26
3.64
3.64
1.46
13.44
4.24
4.24
1.70
15.98
42
42
37
37
32
32
27
27
22
22
17
17
12
Jun-13
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Operating profit margin
EBITDA/net interest (x)
Net debt/equity
Net debt/EBITDA (x)
CF from operations/net debt
Per share data (RMB)
EPS Rep (fully diluted)
HSBC EPS (fully diluted)
DPS
Book value
92
Dec-13
Midea Group Co Ltd
Source: HSBC
Note: price at close of 04 Jun 2015
Jun-14
Dec-14
Rel to SSE COMPOSITE INDEX
12
Jun-15
Gree Electric DCF valuation (RMBm)
171,670
60,687
Equity value
Number of shares (m)
Value per share (RMB)
232,357
3,008
77.2
Explicit
2015
150,785
8%
18,549
12.3%
13,912
1,398
15,310
105
-7,881
-73.1%
1,000
6,324
Explicit
2016
167,984
11%
21,748
12.9%
16,311
1,535
17,846
122
-4,537
-26.4%
1,000
12,186
Explicit
2017
187,636
12%
25,255
13.5%
18,941
1,678
20,619
141
-4,794
-24.4%
1,000
14,684
Semi-explicit
2018
197,017
5%
23,642
12.0%
17,732
1,718
19,450
133
-2,345
-25.0%
800
16,171
Semi-explicit
2019
206,868
5%
23,790
11.5%
17,842
1,758
19,600
134
-2,463
-25.0%
800
16,203
Semi-explicit
2020
217,212
5%
24,979
11.5%
18,735
1,798
20,532
141
-2,586
-25.0%
800
17,006
Semi-explicit
2021
228,072
5%
26,228
11.5%
19,671
1,838
21,509
148
-2,715
-25.0%
800
17,846
Semi-explicit
2022
234,914
3%
21,142
9.0%
15,857
1,868
17,725
122
-1,711
-25.0%
600
15,293
Semi-explicit
2023
241,962
3%
21,777
9.0%
16,332
1,898
18,230
125
-1,762
-25.0%
600
15,743
Semi-explicit
2024
249,221
3%
22,430
9.0%
16,822
1,928
18,750
129
-1,815
-25.0%
600
16,207
Semi-explicit
2025
256,697
3%
23,103
9.0%
17,327
1,958
19,285
132
-1,869
-25.0%
600
16,684
Terminal
Free cash flow calculation
Sales
Sales growth
EBIT
EBIT margin
NOPAT
Depreciation
Gross cash flow
Less minority interest EBITDA
Increase in working capital
Chg in WC as a % of inc sales
Maintenance Capex
Free cash flow
Year
WACC
PV of cash flow
NPV of cash flows
Number of shares (m)
Long-term growth rate
1
8.60%
5,824
171,670
3,008
0%
2
3
4
5
6
7
8
9
10
11
11
10,332
11,465
11,625
10,726
10,366
10,017
7,904
7,493
7,102
6,732
72,083
WACC calculation
Cost of equity
Cost of debt
Tax rate
Target equity ratio
Target debt ratio
Risk free rate (Rf)
Equity risk premium
Specific beta
WACC
Consumer Brands & Retail
China – Equities
June 2015
NPV of cash flows
Net cash (debt)
178,633
9.0%
6.0%
25.0%
90%
10%
3.5%
5.5%
1.00
8.6%
Source: Company data, HSBC estimates
abc
93
94
Qingdao Haier DCF valuation (RMBm)
84,120
25,332
Equity value
Number of shares (m)
Value per share (RMB)
109,452
3,046
35.9
Explicit
2015
93,669
6%
8,491
9.1%
6,368
775
7,143
1,864
-1,393
-28.5%
1,500
2,386
Explicit
2016
103,518
11%
9,786
9.5%
7,339
872
8,211
2,087
291
3.0%
1,500
4,916
Explicit
2017
115,541
12%
11,218
9.7%
8,414
970
9,384
2,324
457
3.8%
1,500
6,017
Semi-explicit
2018
122,474
6%
11,023
9.0%
8,267
1,015
9,282
2,299
173
2.5%
900
6,257
Semi-explicit
2019
129,822
6%
11,684
9.0%
8,763
1,060
9,823
2,433
184
2.5%
900
6,674
Semi-explicit
2020
137,611
6%
12,385
9.0%
9,289
1,105
10,394
2,574
195
2.5%
900
7,115
Semi-explicit
2021
145,868
6%
13,128
9.0%
9,846
1,150
10,996
2,723
206
2.5%
900
7,579
Semi-explicit
2022
153,161
5%
12,253
8.0%
9,190
1,195
10,385
2,572
182
2.5%
900
7,095
Semi-explicit
2023
160,819
5%
12,866
8.0%
9,649
1,240
10,890
2,697
191
2.5%
900
7,484
Semi-explicit
2024
168,860
5%
13,509
8.0%
10,132
1,285
11,417
2,828
201
2.5%
900
7,890
Semi-explicit
2025
177,303
5%
14,184
8.0%
10,638
1,330
11,969
2,964
211
2.5%
900
8,315
Terminal
Year
WACC
PV of cash flow
NPV of cash flows
Number of shares (m)
Long-term growth rate
1
8.10%
2,207
84,120
3,046
0%
2
3
4
5
6
7
8
9
10
11
11
4,207
4,763
4,582
4,521
4,459
4,394
3,805
3,713
3,621
3,530
40,318
WACC calculation
Cost of equity
Cost of debt
Tax rate
Target equity ratio
Target debt ratio
Risk free rate (Rf)
Equity risk premium
Specific beta
WACC
8.45%
6.0%
25.0%
90%
10%
3.5%
5.5%
0.90
8.1%
Free cash flow calculation
Sales
Sales growth
EBIT
EBIT margin
NOPAT
Depreciation
Gross cash flow
Less minority interest EBITDA
Increase in working capital
Chg in WC as a % of inc sales
Maintenance Capex
Free cash flow
Consumer Brands & Retail
China – Equities
June 2015
NPV of cash flows
Net cash (debt)
94,968
Source: Company data, HSBC estimates
abc
Midea DCF valuation (RMBm)
184,825
12,909
Equity value
Number of shares (m)
Value per share (RMB)
197,734
4,216
46.9
Explicit
2015
160,011
12%
17,640
11.0%
13,230
2,575
15,805
1,704
-2,190
-12.4%
1,000
10,911
Explicit
2016
181,237
13%
20,108
11.1%
15,081
2,786
17,867
1,926
-2,178
-10.3%
1,000
12,763
Explicit
2017
205,112
13%
23,265
11.3%
17,449
2,992
20,441
2,203
-2,433
-10.2%
1,000
14,805
Semi-explicit
2018
219,470
7%
21,947
10.0%
16,460
3,032
19,492
2,101
-1,436
-10.0%
800
15,155
Semi-explicit
2019
234,833
7%
23,483
10.0%
17,612
3,072
20,684
2,229
-1,536
-10.0%
800
16,119
Semi-explicit
2020
251,271
7%
25,127
10.0%
18,845
3,112
21,957
2,367
-1,644
-10.0%
800
17,147
Semi-explicit
2021
268,860
7%
26,886
10.0%
20,164
3,152
23,316
2,513
-1,759
-10.0%
800
18,244
Semi-explicit
2022
282,303
5%
22,584
8.0%
16,938
3,182
20,120
2,169
-1,344
-10.0%
600
16,007
Semi-explicit
2023
296,418
5%
23,713
8.0%
17,785
3,212
20,997
2,263
-1,412
-10.0%
600
16,722
Semi-explicit
2024
311,239
5%
24,899
8.0%
18,674
3,242
21,916
2,362
-1,482
-10.0%
600
17,472
Semi-explicit
2025
326,801
5%
26,144
8.0%
19,608
3,272
22,880
2,466
-1,556
-10.0%
600
18,258
Terminal
Free cash flow calculation
Sales
Sales growth
EBIT
EBIT margin
NOPAT
Depreciation
Gross cash flow
Less minority interest EBITDA
Increase in working capital
Chg in WC as a % of inc sales
Maintenance Capex
Free cash flow
Year
WACC
PV of cash flow
NPV of cash flows
Number of shares (m)
Long-term growth rate
1
8.60%
10,047
184,825
4,216
0%
2
3
4
5
6
7
8
9
10
11
11
10,821
11,559
10,896
10,670
10,452
10,240
8,273
7,958
7,657
7,367
78,884
WACC calculation
Cost of equity
Cost of debt
Tax rate
Target equity ratio
Target debt ratio
Risk free rate (Rf)
Equity risk premium
Specific beta
WACC
Consumer Brands & Retail
China – Equities
June 2015
NPV of cash flows
Net cash (debt)
195,486
9.0%
6.0%
25.0%
90%
10%
3.5%
5.5%
1.00
8.6%
Source: Company data, HSBC estimates
abc
95
96
White Goods Comp Table
BLM code
CY Mkt-Cap
End USD m
Domestic Peers
Gree Electric (TP: RMB77.2, Rating: Buy)
Midea (TP: RMB46.9, Rating: Buy)
Qingdao Haier (TP: RMB35.9, Rating: Buy)
Hangzhou Robam App.
Zhejiang Supor
Zhejiang Dun'An Artificial Env.
Guangdong Elecpro Elec. Appliance Hldg.
Hisense Kelon Elect.Hdg.
Zhejiang Kangsheng
Joyoung
Wuxi Little Swan
Jiangsu Changfa Refrig.
Guangdong Chant Gp.
Zhejiang Meida Industrial
Guangdong Xinbao Elect. App.Hdg.
Guangdong Vanward New Electric
Zhenjiang Dongfang Elec. Heating Tech.
Changshu Tianyin Electromechanical
Aucma
Vatti
Shai.Highly (Gp.)
Guangdong Macro
Hefei Meiling
Huayi Compr
Zhejiang Aishida Elec.
Sichuan Yimikang Env. Tech
Jiangsu Chunlan Refrigg. Equ.Stk.
Guangdong Homa App.
Ningbo Snlt.Elect.Appc.
Guangdong Huasheng Elect.App.
Average
000651 CH
000333 CH
600690 CH
002508 CH
002032 CH
002011 CH
002260 CH
000921 CH
002418 CH
002242 CH
000418 CH
002413 CH
002616 CH
002677 CH
002705 CH
002543 CH
300217 CH
300342 CH
600336 CH
002035 CH
600619 CH
000533 CH
000521 CH
000404 CH
002403 CH
300249 CH
600854 CH
002668 CH
002473 CH
002670 CH
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Jan
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Jan
Dec
31,565
26,116
15,130
3,326
3,065
2,835
2,487
2,483
2,380
2,285
2,242
2,214
2,092
1,916
1,819
1,710
1,554
1,507
1,493
1,319
1,315
1,222
1,144
1,111
1,065
995
984
967
853
604
Ccy
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
Price Rev CAGR EPS CAGR ______ PE (x) ______ _____ PB (x) ______ ___ P/Sales (x) _____ __ EPS Growth ____ ______ ROE _______
2-Jun (2014-16e) (2014-16e) CY14a CY15e CY16e CY14a CY15e CY16e CY14a CY15e CY16e CY14a CY15e CY16e CY14a CY15e CY16e
64.2
38.4
30.9
42.4
30.0
20.8
58.1
14.1
38.9
18.4
24.0
62.2
37.0
59.3
25.5
24.1
24.3
46.6
13.6
22.8
16.1
11.0
10.2
12.3
27.5
35.0
11.7
36.2
33.0
18.7
9.5%
12.9%
8.0%
31.6%
15.4%
14.2%
70.5%
12.9%
-66.6%
12.7%
15.1%
NA
NA
14.5%
NA
18.5%
42.5%
28.0%
NA
18.2%
NA
NA
9.3%
14.4%
NA
NA
NA
NA
-65.7%
NA
11%
17.6%
20.9%
15.9%
35.4%
16.4%
61.2%
114.6%
40.8%
-64.1%
11.4%
18.1%
NA
104.9%
16.6%
NA
25.1%
60.0%
36.3%
NA
25.8%
NA
NA
22.1%
22.8%
NA
NA
NA
24.9%
-63.5%
NA
27%
13.6 11.6
9.9
15.4 12.1 10.6
18.9 16.3 14.1
36.5 26.8 19.9
27.6 23.5 20.3
138.7 42.8 53.4
468.2 403.2 101.7
28.2 15.0 14.2
223.3 147.7 1,728.4
26.3 24.0 21.2
21.8 18.6 15.6
NA
NA
NA
174.6 93.7 41.6
85.9 73.0 63.2
52.0 43.2
NA
39.6 29.9 25.3
93.6 53.2 36.5
106.0 70.5 57.0
NA
NA
NA
29.2 23.6 18.4
NA 42.4
NA
NA
NA
NA
26.4 21.7 17.7
36.7 29.5 24.3
NA 66.2 49.6
NA
NA
NA
NA
NA
NA
29.4 24.8 18.9
36.4 23.4 273.1
NA
NA
NA
78.6 55.7 119.8
4.4
4.1
4.4
8.2
5.0
5.0
43.8
5.5
7.8
4.6
3.4
NA
NA
12.0
5.2
4.1
8.3
11.8
NA
5.6
NA
NA
2.3
3.3
NA
NA
NA
NA
4.1
NA
7.6
3.7
3.4
3.7
6.3
4.3
4.8
43.2
4.3
7.1
3.9
2.9
NA
7.4
19.9
4.7
3.5
7.3
8.8
NA
4.7
3.3
NA
2.1
3.1
3.7
NA
NA
3.4
3.3
NA
6.8
3.1
2.9
3.1
5.0
3.7
4.4
38.0
3.8
85.3
3.5
2.4
NA
6.5
9.0
NA
3.0
6.4
9.6
NA
3.7
NA
NA
1.9
2.8
3.5
NA
NA
2.9
38.7
NA
11.1
1.4
1.1
1.1
5.7
2.0
2.7
22.3
0.6
8.0
2.4
1.3
NA
NA
25.3
2.0
2.7
9.4
22.8
NA
1.9
NA
NA
0.7
1.0
NA
NA
NA
NA
1.5
NA
5.8
1.3
1.0
1.0
4.4
1.7
2.4
15.0
0.5
6.1
2.1
1.1
NA
7.3
22.4
1.8
2.2
6.6
16.4
NA
1.6
0.8
NA
0.6
0.8
2.6
NA
NA
1.0
1.1
NA
4.2
1.2
0.9
0.9
3.3
1.5
2.0
7.7
0.5
71.7
1.9
1.0
NA
4.5
19.3
NA
1.9
4.6
13.9
NA
1.4
NA
NA
0.6
0.8
2.2
NA
NA
0.9
12.7
NA
7.1
30% 17% 18%
-21% 28% 15%
7% 16% 16%
44% 36% 35%
17% 17% 15%
-40% 224% -20%
NA 16% 297%
-46% 88%
5%
NA 51% -91%
13% 10% 13%
69% 17% 19%
NA
NA
NA
NA 86% 125%
NA 18% 16%
-7% 20%
NA
8% 32% 18%
14% 76% 46%
-13% 50% 24%
NA
NA
NA
21% 24% 28%
NA
NA
NA
NA
NA
NA
8% 22% 22%
12% 24% 21%
NA
NA 33%
NA
NA
NA
NA
NA
NA
4% 19% 32%
NA 56% -91%
NA
NA
NA
7% 43% 27%
38%
28%
22%
26%
20%
4%
0%
22%
3%
18%
17%
0%
6%
15%
0%
10%
9%
12%
0%
21%
0%
0%
9%
11%
0%
0%
0%
0%
10%
0%
10%
34%
31%
23%
26%
19%
5%
16%
19%
4%
17%
16%
0%
7%
14%
12%
12%
12%
15%
0%
20%
8%
0%
9%
10%
6%
0%
0%
15%
14%
0%
12%
34%
29%
23%
27%
19%
8%
36%
17%
0%
17%
17%
0%
17%
14%
0%
12%
13%
17%
0%
20%
0%
0%
10%
12%
7%
0%
0%
16%
1%
0%
12%
Consumer Brands & Retail
China – Equities
June 2015
Company
Source: Thomson Reuters Datastream, I/B/E/S consensus estimates, HSBC estimates for covered companies. Ranked by market cap (USD). calendarised to December.
abc
White Goods Comp Table
HK Peers
Haier Electronics (TP: HKD26.5, Rating: Buy)
Skyworth Digital
Hisense Kelon Elect.
TCL MLTM.Tech.
Haier Healthwise
Welling Holding
Aupu Group Holding
Chigo Holding
Average
International Peers
General Electric
Samsung Electronics
Panasonic
Hitachi
Whirlpool
Bosch (TP: INR22,700, Rating: Hold)
Electrolux
LG Electronics (TP: KRW64,000, Rating: Hold)
Average
BLM code
1169 HK
751 HK
921 HK
1070 HK
348 HK
382 HK
477 HK
449 HK
GE US
005930 KS
6752 JP
6501 JP
WHR US
BOS IN
ELUXB SS
066570 KS
CY Mkt-Cap
End USD m
Ccy
Dec
Mar
Dec
Dec
Jan
Dec
Dec
Dec
HKD
HKD
HKD
HKD
HKD
HKD
HKD
HKD
23.1
7.7
7.4
6.7
1.0
1.9
2.3
0.2
12.2%
11.0%
NA
8.1%
NA
NA
NA
NA
10%
17.2%
4.9%
NA
43.2%
NA
NA
NA
NA
22%
21.3
12.4
NA
37.6
NA
NA
NA
NA
23.8
18.3
11.9
10.6
22.9
NA
4.7
NA
6.5
12.5
15.5
11.3
8.7
18.4
NA
NA
NA
NA
13.5
4.3
1.8
NA
2.0
NA
NA
NA
NA
2.7
3.5
1.6
1.4
1.8
NA
NA
NA
0.5
1.8
2.8
1.5
1.0
1.7
NA
NA
NA
NA
1.8
0.6
0.5
NA
0.3
NA
NA
NA
NA
0.5
0.6
0.5
0.4
0.2
NA
0.4
NA
0.2
0.4
0.5
0.4
0.4
0.2
NA
NA
NA
NA
0.4
14%
24%
NA
NA
NA
NA
NA
NA
19%
17%
4%
NA
65%
NA
NA
NA
NA
28%
17%
6%
22%
25%
NA
NA
NA
NA
17%
25%
16%
0%
5%
0%
0%
0%
0%
6%
22%
14%
27%
8%
0%
22%
0%
8%
13%
21%
14%
25%
9%
0%
0%
0%
0%
9%
Dec 274,871 USD
Dec 170,944 KRW
Mar 35,533 JPY
Mar 32,803 JPY
Dec 14,703 USD
Mar 11,515 INR
Dec 9,397 SEK
Dec 8,150 KRW
27.3
1,303,000
1,806.5
846.4
187.0
22,744.1
258.6
55,400
-5.5%
3.5%
2.5%
2.6%
7.2%
14.1%
7.4%
3.5%
4%
-2.8%
7.8%
18.5%
17.0%
15.8%
30.3%
20.3%
54.8%
20%
16.5
8.3
24.4
15.0
16.4
58.3
22.9
25.0
23.3
21.2
7.6
20.6
12.4
15.1
46.1
22.5
12.8
19.8
17.5
7.1
17.4
10.9
12.2
34.4
15.8
10.4
15.7
2.1
1.2
2.4
1.4
3.0
10.1
4.5
0.9
3.2
2.4
1.0
2.1
1.3
2.8
8.6
3.9
0.8
2.9
2.5
0.9
1.9
1.2
2.4
7.1
3.4
0.7
2.5
1.8
0.9
0.6
0.4
0.7
6.5
0.7
0.2
1.5
2.2
0.9
0.6
0.4
0.7
6.1
0.6
0.1
1.4
2.1
1%
0.9 -22%
0.5
NA
0.4 12%
0.6 14%
5.0 36%
0.6 15%
0.1 126%
1.3 26%
-22%
9%
18%
20%
9%
26%
2%
95%
20%
21%
7%
19%
14%
23%
34%
42%
23%
23%
13%
15%
10%
10%
0%
19%
22%
3%
12%
9%
14%
11%
10%
17%
20%
18%
6%
13%
12%
14%
12%
11%
18%
23%
23%
7%
15%
8,466
2,827
2,483
1,159
757
694
308
254
Price Rev CAGR
2-Jun (2014-16e)
EPS CAGR ______P/E (x) ______ _____ P/B (x) ______ ____ P/Sales (x) ____ ___ EPS Growth ____ ______ ROE_______
(2014-16e) CY14a CY15e CY16e CY14a CY15e CY16e CY14a CY15e CY16e CY14a CY15e CY16e CY14a CY15e CY16e
Consumer Brands & Retail
China – Equities
June 2015
Company
Source: Thomson Reuters Datastream, I/B/E/S consensus estimates, HSBC estimates for covered companies. Ranked by market cap (USD). Calendarised to December
abc
97
Consumer Brands & Retail
China – Equities
June 2015
abc
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Lina Yan and Erwan Rambourg
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons
when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different
securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and
therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should
carefully read the entire research report and not infer its contents from the rating because research reports contain more
complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12
months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will
be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a
Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is
between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more
than 20% below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage,
change in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The target price for a stock represented the value the analyst expected the
stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as
Overweight, the potential return, which equals the percentage difference between the current share price and the target price,
including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the
succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight,
the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months
(unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which
we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average
of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to
move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities
As of 05 June 2015, the distribution of all ratings published is as follows:
Buy
39%
(29% of these provided with Investment Banking Services)
Hold
43%
(29% of these provided with Investment Banking Services)
Sell
18%
(20% of these provided with Investment Banking Services)
98
abc
Consumer Brands & Retail
China – Equities
June 2015
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to
current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our
current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings
and basis for financial analysis” above.
HSBC & Analyst disclosures
Disclosure checklist
Company
GREE ELECTRIC APPLIANCES
MIDEA GROUP CO LTD
Ticker
Recent price
Price Date
Disclosure
000651.SZ
000333.SZ
62.53
38.03
04-Jun-2015
04-Jun-2015
4, 5, 6, 7
2, 6, 7
Source: HSBC
1
2
3
4
5
6
7
8
9
10
11
HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
As of 30 April 2015 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
As of 30 April 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
As of 30 April 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
As of 30 April 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
A covering analyst/s has received compensation from this company in the past 12 months.
A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives)
of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
Additional disclosures
1
2
3
This report is dated as at 05 June 2015.
All market data included in this report are dated as at close 01 June 2015, unless otherwise indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
99
Consumer Brands & Retail
China – Equities
June 2015
abc
Disclaimer
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[463412]
100
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Global Consumer Brands & Retail
Research Team
Europe
Asia
Consumer Brands & Retail
Antoine Belge
Head of Consumer Brands and Retail Equity Research
+33 1 56 52 43 47
[email protected]
Consumer Brands & Retail
Erwan Rambourg
Head of Consumer Brands and Retail Equity Research
+852 2996 6572
[email protected]
Christopher Leung
Analyst
+852 2996 6531
[email protected]
Lina Yan
Analyst
+852 2822 4344
[email protected]
Catherine Chao
Analyst
+852 2996 6570
[email protected]
Charlene Liu
+852 2822 4398
[email protected]
[email protected]
Karen Choi
Analyst
+822 3706 8781
[email protected]
[email protected]
Jena Han
Analyst
+822 3706 8772
[email protected]
Anne-Laure Jamain
Analyst
+44 207 991 6587
[email protected]
David McCarthy
Head of Consumer Retail, Europe
+44 207 992 1326
[email protected]
Andrew Porteous
Analyst
+44 20 7992 4647
Paul Rossington
Analyst
+44 20 7991 6734
Jérôme Samuel
Analyst
+33 1 56 52 44 23
[email protected]
Emmanuelle Vigneron
Analyst
+33 1 56 52 43 19
[email protected]
Graham Jones
Analyst
+44 20 7992 5347
Damian McNeela
Analyst
+44 20 7992 4223
[email protected]
[email protected]
Permada (Mada) Darmono
Analyst
+65 6658 0613
[email protected]
Amit Sachdeva
Analyst
+91 22 2268 1240
[email protected]
Chloe Wu
Analyst
+ 8862 6631 2866
[email protected]
CEEMEA
North & Latin America
Consumer Brands & Retail
Bulent Yurdagul
Analyst
+90 212 3764612
[email protected]
Consumer & Retail
Richard Cathcart
Analyst
+55 11 2169 4429
[email protected]
Jeanine Womersley
Analyst
+27 21 6741082
[email protected]
Ana C Hernandez
Associate
+52 55 5721 2745
[email protected]
Ankur P Agarwal
Analyst
+966 11 299 2103
[email protected]
Yazeed Al Turki
Analyst
+966 11 299 2260
Food & Beverage
Carlos Laboy
Global Head of Beverages Research
+1 212 525 6972
[email protected]
[email protected]
James Watson, CFA
Analyst
+1 212 525 4905
[email protected]
Specialist Sales
David Harrington
+44 20 7991 5389
[email protected]
Catherine Foster
Analyst
+55 11 3847 9348
[email protected]
Henry Nasser
Analyst
+55 11 2169 4424
[email protected]
Agricultural Products
Alexandre Falcao
Analyst
+55 11 3371 8203
[email protected]
Ravi Jain
Analyst
+1 212 525 3442
[email protected]
Gustavo Gregori
Analyst
+55 11 3847 9881
[email protected]
Lina Yan*
Analyst
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 4344
[email protected]
Lina Yan joined HSBC in May 2010 as a Hong Kong and China consumer analyst. Prior to this, she worked for six years as
a buy-side analyst, spending three years covering the consumer and property sectors at a Hong Kong-based institutional fund
house specialising in China equities and another three years as an investment analyst in Canada. Lina holds an MSc in finance from
the University of British Columbia.
Erwan Rambourg*
Analyst
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6572
[email protected]
Erwan Rambourg is Global Co-Head of Consumer & Retail Research and a top-ranked analyst covering the luxury and sporting
goods sectors. Erwan joined HSBC in 2005 after working for eight years as a marketing manager in the luxury goods industry,
notably for Richemont and LVMH. He is regularly featured in the Wall Street Journal and the Financial Times, and appears on CNBC
and Bloomberg. He is the author of The Bling Dynasty - Why the Reign of Chinese Luxury Shoppers Has Only Just Begun, a book
published by Wiley in September 2014.
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited