china home appliance sector

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

26 October 2016 Asia Pacific/Hong Kong

Equity Research Consumer Discretionary

China Home Appliance Sector Research Analysts

Raymond Ching

852 2101 7852

[email protected]

Carey Shi

852 2101 7729

[email protected]

ASSUMING COVERAGE

Riding on consumption upgrade and industry consolidation ■ We assume coverage on China's home appliances sector. We forecast

5% sector growth for 2016-18, up from 2% in 2014-15 driven by the end of the air conditioning (AC) price war, product mix enhancement, rising replacement need and strong property cycle starting from 2H15 (delay of 9-12 months). By category, white goods is a mature segment with 3-5% growth. Kitchenware is at a growing stage with a 9% CAGR, supported by low penetration and trade-up. In this report, we initiate on four white goods brands – Midea (OUTPERFORM, TPRmb34.50), Gree (OUTPERFORM, TP Rmb28), QD Haier (OUTPERFORM, TP Rmb12.30), Haier Electronics (NEUTRAL, TP HK$13.40) – and two kitchenware brands – Hangzhou Robam (OUTPERFORM, TP Rmb50.30) and Joyoung (NEUTRAL, TP Rmb21.50).

■ AC rebounds, kitchenware has the fastest growth. AC inventory issues have largely been resolved, and we expect a double-digit sales recovery in 2H16/1H17, which should act as a key share price catalyst for market leaders Gree and Midea. Kitchenware has the highest potential as consumers are trading up. Segment leaders, including Robam, would gain market share with their strong branding and differentiated products.

■ White goods giants eyeing global. With overseas M&As and strong export sales driven by RMB depreciation, we expect overseas sales of QD Haier, Midea and Gree to reach 45%/55%25% in 2017E. Toshiba and GEA acquisitions will help Midea and QD Haier tap into Japan and the US markets while cross-selling their brands to China. KUKA acquisition should enhance Midea's automation and tap into the fast growing robotic market.

■ Our top picks (OUTPERFORMs) are Midea, Robam and Gree. We like Midea for its strongest earnings prospect among white goods players and well-diversified product category, Robam for its strongest momentum as it is the market share taker in the fast-growing imbedded kitchenware segment. We like Gree for its cheap valuation, high dividend yield and accelerated earnings growth on AC restocking. Risks to our rating and TP include consumption trends change, adverse pricing competition and volatile raw material prices.

Figure 1: CAGR forecast for 2016-18

Source: AVC, CMM, IOL, Company data, Credit Suisse estimates

9%

6%

5%

5%

3%

2%

1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Kitctenware Life smallappliances

AC Water heater Washer Fridge TV

26 October 2016

China Home Appliance Sector 2

Focus charts and tables

Figure 2: Industry growth driven by urbanisation Figure 3: Industry is trading up

Source: AVC,CMM,IOL, Credit Suisse estimates Source: NBS,AVC, r Credit Suisse estimates

Figure 4: We expect margin expansion for most of

our coverage companies Figure 5: AC inventory issues almost solved

Source: Credit Suisse estimates Source: AVC, IOL, Credit Suisse estimates

Figure 6: White goods sector trading at 11x P/E Figure 7: Kitchenware sector trading at 19x P/E

Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates

Figure 8: TP and highlights

Company Name CS Ticker Rating Last Price TP Upside Mkt Cap Trd vol CAGR P/E P/E PEG P/B ROE DY

/Downside US$mn US$ mn 16-18E 2016E 2017E 2017E 2017E 2017E 2017E

Qingdao Haier 600690.SS O 10.3 12.3 19.6% 9,141 40 15.0% 12.4 10.8 0.9 2.0 19% 2%

Midea Group 000333.SZ O 26.8 34.5 28.7% 25,075 128 14.8% 11.7 10.1 0.8 2.4 24% 4%

Gree Electric 000651.SZ O 23.0 28.0 21.6% 19,892 138 11.3% 9.5 8.7 0.8 2.4 27% 8%

Haier Electronic 1169.HK N 12.5 13.4 7.0% 4,464 6 10.3% 11.5 10.4 1.1 2.0 15% 1%

Robam 002508.SZ O 38.6 50.3 30.3% 4,135 25 28.2% 23.9 18.4 0.8 5.5 30% 2%

Joyoung Co 002242.SZ N 19.9 21.5 8.0% 2,266 15 11.5% 22.1 19.7 1.9 4.0 20% 4%

Source: Company data, Credit Suisse estimates price is as of Oct 25, 2016 market close

The authors of this report wish to acknowledge the contribution made by Yvonne Wu, an employee of

Evalueserve, a third-party provider of offshore research services to Credit Suisse

0

20

40

60

80

100

120

140

Color TV Air Conditioner Refrigerator WashingMachine

Water heater

Urban Rural

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2012 2013 2014 2015 6M16AC Washer Fridge Gas stove Range hood Sterilizer

Rmb

0%

5%

10%

15%

20%

25%

Midea Gree QD Haier Haier Elec Robam Joyoung

2016 NPM 2018E NPM

30

40

26

-

5

10

15

20

25

30

35

40

45

2014 Jul 2015 Jul 2016 Jul

mn units

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

Jan10

Apr10

Jul10

Oct10

Jan11

Apr11

Jul11

Oct11

Jan12

Apr12

Jul12

Oct12

Jan13

Apr13

Jul13

Oct13

Jan14

Apr14

Jul14

Oct14

Jan15

Apr15

Jul15

Oct15

Jan16

Apr16

Jul16

Mean: 11

Std: 2.3

Mean

Mean +2 std

Mean -2 std

Mean +1 std

Mean -1 std

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan10

Apr10

Jul10

Oct10

Jan11

Apr11

Jul11

Oct11

Jan12

Apr12

Jul12

Oct12

Jan13

Apr13

Jul13

Oct13

Jan14

Apr14

Jul14

Oct14

Jan15

Apr15

Jul15

Oct15

Jan16

Apr16

Jul16

Mean: 19.3Std: 4.3

Mean -1 std

Mean

Mean +1 std

Mean -2 std

Mean +2 std

26 October 2016


Riding on consumption upgrade and industry consolidation

Growth: Kitchenware > small appliance > white goods

We expect the home appliance sector growth to accelerate to 5% over 2016-18, faster

than +2% in 2014/15, thanks to the end of the AC price war as channel inventory improves

along with rising replacement needs as sales during 2008-13 driven by government

subsidies program will enter into replacement cycle (normal replacement at 8-10 years for

large appliance). The strong property cycle starting in 2H15 will partially boost sales

demand. We expect the traditional white goods to post stable growth, while we see

strong potential in kitchenware and small appliances categories.

White goods sector: A relatively mature market

White goods segment is at a mature stage. We expect AC, water heater, washing machine

and refrigerator growing at 5%, 5%, 3%, 2% CAGR, respectively. AC and water heater

should have stronger outlook as these two categories are still under penetrated.

Consumption upgrade and replacement needs will be the key drivers. The strong property

market starting in 2H15 will be positive to the sector in 2H16/1H17. Nevertheless,

correlation between property and home appliance sales is gradually diminishing, as

replacement demand is picking up and many new home sales are driven by investment

purpose. In the near term, we see double-digit AC sales growth at the manufacturing

end, which should be key share price catalyst for market leaders Gree and Midea.

White goods giants eyeing global

White goods giants are expanding to overseas through M&As and switching from OEM

(original equipment manufacturer) to OBM (original brand manufacturer). Toshiba and

GEA acquisitions will help Midea and QD Haier tap into Japan and the US markets while

cross-selling their brands to China. KUKA acquisition would enhance Midea's automation

and tap into the fast growing robotic market. Strong R&D capability and RMB depreciation

will strengthen brand image and drive better OBM sales. We forecast overseas to account

for 45%/55%/25% of QD Haier, Midea and Gree in 2017E from 21%/40%/15% in 2015.

Kitchenware: A fast-growing segment

Kitchenware market is at a growing stage. We expect the industry to witnessed a 9%

CAGR over 2016-18 backed by: (1) low penetration rate of 30-40% versus white goods at

70-90%, (2) rising demand driven by aging population and two child policy and (3) upgrade

to better brands and products with more functionality as the Chinese has higher standard

of living. At imbedded kitchenware, consumers are trading up to premium brands such as

Robam and Fotile. At small kitchen appliances, growth is driven by specialisation and

product category expansion. Midea, Joyoung and Supor are the key market players.

Top picks: Midea, Robam, and Gree

With this sector report, we initiate and assume coverage on the four white goods

companies—Midea, Gree QD Haier, Haier Electronic (NEUTRAL) and two kitchenware

companies—Robam (OUTPERFORM) and Joyoung (NEUTRAL). Our top picks are

Midea, Robam and Gree. We like Midea for its strongest earnings outlook at 14.8%

CAGR (0.8 PEG) and well-diversified product categories, Robam for its 28% earnings

CAGR over 2016-18 backed by market share gain in the fast growing kitchenware

segment, and Gree for its attractive valuation at 10.5x P/E (5x ex-cash P/E) along with

accelerating earnings growth of 11.3% 2016-18 CAGR. We rate Joyoung and Haier

Electronic at NEUTRAL as their earnings outlook and valuation are not attractive enough.

26 O

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4

Figure 9: Valuation table

Company Name CS Ticker Price Market Cap Rating TP GPM GPM OPM OPM NPM NPM ROE ROE CAGR P/E PEG P/B

2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 16-18E 2017E 2017E 2017E

White good

Qingdao Haier 600690.SS 10.28 9,141 O 12.3 28.8% 29.7% 7.0% 6.7% 4.4% 4.2% 19.1% 18.8% 15% 10.8 0.7 2.0

Hisense Kelon 000921.SZ 11.39 1,893 NC na 24.0% 24.6% 4.8% 5.6% 4.6% 5.3% 24.5% 25.4% 22% 15.6 0.7 3.2

Midea Group Co 000333.SZ 26.8 25,075 O 34.5 29.5% 32.7% 9.5% 10.4% 9.6% 9.9% 24.2% 23.8% 15% 10.1 0.7 2.4

Guangdong Homa 002668.SZ 78.22 1,797 NC na 33.1% 32.2% 8.4% 8.3% 6.2% 6.1% 13.5% 12.6% 18% 30.1 1.7 5.9

Hefei Meiling 000521.SZ 7.02 999 NC na 21.0% 21.4% 2.5% 2.9% 2.0% 2.2% 6.5% 7.3% 20% 21.6 1.1 1.7

Haier Electronic 1169.HK 12.46 4,464 N 13.4 16.7% 16.7% 5.1% 5.3% 4.3% 4.4% 15.3% 14.7% 10% 10.4 1.0 2.0

Whirlpool Chin-A 600983.SS 11.56 1,279 NC na 33.5% 33.7% 6.2% 6.8% 5.9% 6.2% 8.3% 9.1% 24% 19.8 0.8 1.9

Wuxi Little Sw 000418.SZ 34 2,797 NC na 27.1% 27.5% 9.7% 9.9% 7.3% 7.4% 20.0% 20.8% 23% 15.2 0.7 3.6

Gree Electric 000651.SZ 23.03 19,892 O 28.0 36.4% 37.7% 12.3% 14.0% 13.8% 13.7% 27.4% 27.2% 11% 8.7 0.8 2.4

Average 27.8% 28.5% 7.3% 7.8% 6.5% 6.6% 17.6% 17.7% 14% 11.1 0.7 2.2

Kitchenware

Hangzhou Robam 002508.SZ 38.59 4,135 O 50.3 58.9% 59.2% 22.3% 23.7% 20.2% 21.3% 29.0% 29.6% 28% 18.4 0.7 5.5

Zhejiang Supor 002032.SZ 37.26 3,444 NC na 30.0% 30.3% 11.3% 11.8% 9.0% 9.5% 20.3% 20.2% 18% 18.4 1.0 4.5

Joyoung Co 002242.SZ 19.91 2,266 N 21.5 31.9% 31.6% 11.4% 11.1% 9.0% 8.9% 20.2% 20.5% 12% 19.7 1.7 4.0

Guangdong Xinb 002705.SZ 17.34 1,500 NC na 20.1% 20.8% 7.4% 8.5% 5.8% 6.6% 15.6% 17.7% 26% 19.0 0.7 3.5

Zhejiang Meida 002677.SZ 12.62 1,170 NC na 54.3% 56.4% 36.1% 37.7% 31.4% 32.6% 17.9% 20.6% 31% 28.4 0.9 6.7

Vatti Corp Ltd 002035.SZ 25.92 1,383 NC na 42.0% 42.3% 8.1% 9.1% 7.0% 7.7% 17.9% 19.5% 34% 23.5 0.7 5.3

Guangdong Vanward 002543.SZ 17.85 1,130 NC na 33.5% 33.8% 8.9% 9.2% 7.8% 8.0% 12.3% 12.9% 17% 18.2 1.1 2.6

Average 38.7% 39.2% 15.1% 15.9% 12.9% 13.5% 19.0% 20.1% 24% 20.78 1.0 4.6

Note O = Outperform, NC= Not covered. Source: Reuters, Bloomberg estimates for NC companies, Credit Suisse estimates for rated companies

26 October 2016


Table of contents

Riding on consumption upgrade and industry consolidation 1

Focus charts and tables 2

Riding on consumption upgrade and industry consolidation 3

Growth: Kitchenware > small appliance > white goods 6

White goods: A relatively mature market 8

China white goods giants eyeing global 24

Top picks: Midea, Robam and Gree 36

China Home Appliance Sector through HOLT Lens™ 40

Midea Group Co Ltd (000333.SZ / 000333 CH) 43

Gree Electric Appliances Inc of Zhuhai (000651.SZ / 000651 CH) 59

Qingdao Haier Co., Ltd. (600690.SS / 600690 CH) 72

Haier Electronics Group Co., Ltd. (1169.HK / 1169 HK) 82

Hangzhou Robam Appliances Co Ltd (002508.SZ / 002508 CH) 86

Market share taker in a fast growing industry 86

Joyoung Co Ltd (002242.SZ / 002242 CH) 101

26 October 2016


Growth: Kitchenware > small appliance > white goods We expect home appliance sector growth to accelerate to 5% over 2016-18 from 2% in

2014-15 led by: (1) the end of the AC price war after inventory overhang issue was

resolved, (2) product mix enhancement and (3) rising replacement demand, as consumer

electronics purchased in 2008-13 during the government subsidies program are entering

into the replacement phase. In addition, the strong property cycle starting from 2H15 will

partially boost sales demand in 2H16 and 1H17, considering the 9-12 months delay effect.

China home appliance sector is made up of multiple categories (see figure 2) and each is

at a different development stage. Overall, when comparing to the developed markets such

as the US, Western Europe and Japan, we still see room for penetration as China’s

urbanisation rate is only 56% versus over 75% for the developed markets.

By category, traditional white goods sector (air conditioning, refrigerator and washing

machines) has entered into a mature stage with stable growth. Traditional TVs are in a

declining stage as consumers are watching media through portable devices such as smart

phones and personal laptops (we have not initiated coverage on TV segment at present).

In contrast, kitchenware and small appliances are in the growing stage supported by new

features and specialisation. Household robots, kitchen waste processor and other

innovative products are in introduction period with huge potential upside, in our view.

Figures 2 and 3 below summarise the growth of major electronic categories as well as

their development cycles.

We expect kitchenware companies including Robam to deliver stronger earnings outlook

than the white goods companies, but we believe that has also reflected in a higher

valuations of kitchenware and small appliance companies.

Figure 10: Home appliances industry growth cycle

Source: Credit Suisse research

Introduction period Growing period Mature period Declining period

Household

robotics

Kitchen-waste

processor

Small

kitctenware

Life small appliances White goods

Traditional TV

Fan

Embedded

kitchenware

26 October 2016


Figure 11:CAGR forecast for 2016-18

Source: AVC, CMM, IOL, Company data, Credit Suisse estimates

Figure 12: Home appliance sector is expected to

grow at 5% CAGR over 2016-18

Figure 13: TV/AC/Kitchenware are the three biggest

segments in the China market

Source: CMM, Credit Suisse estimates


9%

6%

5%

5%

3%

2%

1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%


AC Water heater Washer Fridge TV

8,001

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Rmb 100 mnAC

20%

Washer7%

Fridge13%

Kitctenware17%

Life small appliances

7%

TV22%

Water heater14%

26 October 2016


White goods: A relatively mature market China white goods sector is a relatively mature market. We see the industry growing at 3-

5% CAGR over 2016-18 driven by: (1) urbanization, (2) new home sales and (3) product

upgrade/replacement. Based on industry estimate, each factor contributes 25-35%,

20-25%, and 35-45%, respectively.

1) Urbanization drives penetration

In China, the penetration rate for urban area for most appliances are close to the level of

the developed countries, which is more than or close to 100%, and thus volume growth is

capped (see figure 5). We believe urban market growth will be mainly driven by mix and

replacement (average white goods replacement cycle in China is around eight years).

However, AC is a special segment where China's urban area still lags that of developed

countries. China's average AC penetration rate is only 85% versus Hong Kong, Japan,

Taiwan at 223%/147%/135%. Given AC penetration can go up to 200-300% (e.g. two to

three ACs per household), we see room for solid volume growth even in urban areas. In

contrast, we believe washing machine and refrigerator growth in urban areas to be driven

by replacement demand.

We see large growth potential in rural areas of China as the penetration of AC, washing

machine and refrigerator is only at 76%, 14%, and 11%, respectively. We see room for

their penetration rates to catch up to urban area rates during urbanization progress as

income increases.

Overall, urbanization rate in China is only 56% in 2015—it is expected that urbanization

rate will increase to 60% by 2020 based on government target. Rising urbanization and

penetration in rural area will be one of the key drivers of white goods' segment growth.

Figure 14: Rural area home appliances are still

underpenetrated Figure 15: AC penetration can go up to 200-300%

Source: NBS, AVC, Credit Suisse Source: Euromonitor

0

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120

140

Color TV Air Conditioner Refrigerator WashingMachine

Water heater

Urban Rural

85

135147

223

0

50

100

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200

250

China Taiwan Japan Hong Kong

%

26 October 2016


Figure 16: China's urbanization progress continues

Figure 17: China urbanization rate lags developed

countries

Source: World Bank, Credit Suisse estimates Source: World Bank

2) Demand from new home sales

White goods sales are correlated to the property cycle as new home sales trigger new

demand. Our analysis shows that home appliance sales volume lag the property cycle by

around 9-12 months. The strong property cycle started in 2H15 should have a positive

impact to home appliance sales starting in 2H16 to 1H17.

Even if the property cycle decelerates in 2017 and onwards based on our in-house

estimates, we believe the impact can be offset by the new replacement cycle and we also

find the correlation with new home sales is gradually diminishing.

White goods: We estimate that the sales volume correlation between property is around

0.3-0.4 on an average during 2011-Aug 2016. Washing machine has the highest

correlation followed by AC and refrigerator.

Gas stove and range hood in theory should have high correlation, but the correlation is

not meaningful at present due to the relatively low penetration rate of 40%, especially in

rural area. In addition, consumers are trading up for better functionality. Thus, we see

strong demand from existing home and replacement.

Small kitchen and electronic appliances have limited correlation given their low

penetration rate, small ticket size, frequent launch of new models and much shorter

replacement cycle of 2-3 years. Consumers buy small appliances to improve their lifestyle

regardless whether they are buying new property or not.

Figure 18: Small appliances are less correlated to the property cycle

Product (adj 6 months) Microwave Air purifier Water purifier

Correlation (0.13) (0.20) 0.15

Source: IOL, NBS

Correlation with property sales is gradually diminishing

It is interesting to note that correlation between home appliance sales and property cycle

is gradually diminishing in the past few years. Cool summer and inventory issues in

2014/15 have negatively affected AC sales, and washing machine & refrigerator sales are

increasingly driven by replacement demand and product upgrade for better functionality

and energy efficiency.

In addition, new home sales are driven by investment demand instead of actual usage,

which will not generate home appliance needs.

0%

10%

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30%

40%

50%

60%

70%

2000 2003 2006 2009 2012 2015 2018E

Urbanization Rate0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

China EuropeanUnion

United States UnitedKingdom

Japan

26 October 2016


Property sales picked up since 2H15, with sales volume rising by 8% in 2H15 and 27%

YTD; we expect it will trigger better white goods sentiment in 2H16/1H17 taking into

account the 9-12 months lagging effect.

Figure 19: Property market will pick up in 2016E and

slow down in 2017/18E

Figure 20: White goods have diminishing

correlation with property market

Source: NBS, Credit Suisse estimates Source: NBS,IOL Credit Suisse estimates

After the strong momentum in 2H15 and 2016E, our property team is turning more

conservative into 2017E/2018E with projected sales volume to decline by 0.9%/3.5%. We

agree that would have a slightly negative effect to white goods companies in 2H17/2018E

and onwards. Nevertheless, we are not overly concerned, especially for leading white

goods companies given the following:

Correlation is only 0.3 in the past and is on a diminishing trend

A large percentage of property, especially in Tier 1-3 cities are for investment

purpose, which do not generate home appliance sales.

Home appliance segment is entering a replacement cycle starting 2017. The

normal replacement cycle is around eight to ten years—many home appliances

that were bought between 2007 and 2013 triggered by government subsidy

programs are now entering the replacement cycle. The aggregate sales during

2007 to 2013 amounted to Rmb4,800 bn, which is 6.8 times larger than the

annual industry sales of Rmb700 bn, and it's expected to release new demand

gradually.

The strong white goods sales driven by RMB depreciation, stronger Chinese branding and technology should offset a potential domestic sales weakness.

Replacement cycle is shortening as consumers trade up on high-end products

with better functionality and energy efficiency. Many consumers nowadays

replace their home appliance before it is broken/non-functional.

Leading white goods companies are gaining market shares as consumers' trade

up to better brands and quality. We see market consolidation toward the

top 5 companies.

Through M&As and developing own brand sales in foreign market, overseas sales

now accounts for an increasing percentage of the leading white goods companies'

sales. Midea, Gree and QD Haier have strong present in the SE. Asia which is a

growing market.

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

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800

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1,400

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017E

China residential property sold (mn sqm) -LHS YoY change-RHS

mn sqr

-50%

-30%

-10%

10%

30%

50%

70%

1/2012 7/2012 1/2013 7/2013 1/2014 7/2014 1/2015 7/2015 1/2016 7/2016

Property sales YoY AC sales YoY WM sales YoY Fridge sales YoY

26 October 2016


3) Consumption upgrade drives ASP growth

We see white goods and kitchenware ASP growing at 3%/5% CAGR for the next three

years, compared to 2%/6% CAGR in the past few years. Consumers are trading up for

better functionality, smart features and energy efficiency.

In our view, the consumption upgrade trend will continue and kitchenware will continue to

outgrow white goods as trade-up to high-end brands is more obvious. Among domestic

players, we prefer high-end kitchenware brands such as Robam. Consumers are willing to

pay a premium to buy stylish products, as they see imbedded kitchenware (e.g., range

hood and stove) as part of the renovation.

We also like QD Haier and Midea as they have the broadest smart product offerings (see

table 21), which is one of the key driver of industry ASP growth. Gree has less upside due

to single product category, where it is hard to create a smart eco system and its AC selling

price is already at a 15% premium due to its strong branding.

Figure 21: Home appliances sector is trading up with steady ASP increase


Product mix enhancement

Over the last two years, we see product upgrades in AC/washer/refrigerator in terms of

functionality. Better product mix will engine ASP growth. For example, consumers now buy

AC with low noise, larger size and front load washers, and multiple-door refrigerators for

better food management. The below chart summarise the product mix change in various

key appliance categories.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2012 2013 2014 2015 6M16

AC Washer Fridge Gas stove Range hood Sterilizer

Rmb

26 October 2016


Figure 22: Inverter AC increased from 57% to 63%

Figure 23: Large size washer increased from 16% to

39%

Source: CMM Source: CMM

Figure 24: Front-load washer increased from 32% to

41%

Figure 25: Multi-door refrigerator increased from 8%

to 18%


Smart home market—early stage with huge potential

The smart home appliances market is at Rmb90bn, representing 13% of total industry

sales. We expect total smart home market size to double by 2018 with a 26% CAGR due

to low penetration rate. On an average, smart appliances have 20% premium over normal

products. Rising smart appliance will drive industry ASP growth.

Penetration in China is low at 6%/12%/16% for refrigerator, washing machines and AC.

Smart kitchenware penetration is almost zero. CMM expects smart refrigerator/washing

machines/AC penetration to reach 20%/45%/55% in 2020. For Haier, the leading smart

appliances manufacturer only has 15% smart products sales in 2015. We believe the 26%

CAGR is achievable with reference to 78% penetration rate for smart TVs.

57%63%

0%

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100%

2014 7M16Inverter non-inverter

16%

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100%

2014 7M16

>8KG 7-7.9KG 6-6.9KG 5-5.9KG <4.9KG

32%41%

0%

10%

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2014 7M16

Front load Tumbling box Double cylinder Single cylinder

8%

18%

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30%

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70%

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2014 7M16

side by side multiple door 3 door 2 door single door

26 October 2016


Figure 26: Smart home market will grow at a fast

pace

Figure 27: Smart home appliances have low

penetration rate

Source: Haier.com, Credit Suisse estimates Source: AVC, CMM

We conducted a channel check and found that for a similar model, products with smart

features are priced at around 15-25% price premium over non-smart products. That said,

consumer preference to smart products will increase ASP for 2% for the next three years.

Figure 28: Retail price for smart and non-smart products

Product Smart price Non-smart price Premium for smart

function

AC Inverter /3rd grade efficiency 3,466 2,932 18.2%

Refrigerator Two door/530L/non-inverter 3,499 3,099 12.9%

Washing machine 7KG/drum type/non-inverter 1898 1498 26.7%

Source: Tmall, GOME, JD

Midea/Haier leading the trend in smart products

Midea and Haier are the leading domestic players with integrated smart appliances

platform. They are the initial domestic brands to develop integrated smart system back in

2014 (U+ for Haier and M+ for Midea), and they offer the largest smart product categories.

90

180

0

20

40

60

80

100

120

140

160

180

200

2015 2020E

26%

Rmb bn

4% 6%

20%

5%

12%

45%

8%

16%

55%

73%78%

93%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 1H16 2020E

Fridge WM AC TV

26 October 2016


Figure 29: Haier and Midea have broadest smart product categories

Haier Midea TCL Gree Xiaomi Roban Joyoung Skyworth LeTV

Air conditioner Y Y Y Y Y

Air purifier Y Y Y Y Y

Cordless home appliance Y Y

Game Console Y

Refrigerator Y Y Y Y

Smartphone Y Y Y Y

Oven Y Y

Washing machine Y Y

Water heater Y Y

TV Y Y Y Y Y

Robot vacuum cleaner Y Y Y Y

Plug Y

Rice cooker Y Y Y

Kitchen Y

Hood Y

Soymilk machine

Source: Company data, Credit Suisse estimates

Until today, both companies have partnered with Ali, Huawei, Wechat, JD, etc., as well as

international giants including Apple. Midea has also led in Xiaomi with 1.288% stock

offering while Haier has partnered with Meizu.

Amongst white goods leaders, Gree is less active on smart application due to product

concentration. It has partnered with Ali and JD to develop smart ACs. In 2013, the firm

also launched its own Gree smart phone to enlarge its smart product categories. However,

sales of Gree smart phone are way below management and market expectations.

No new government subsidy program at present

We see no new government subsidy program to trigger sales at present. In Nov 2015, the

government launched a new program known as "Energy Top Runner". This program

chose the most energy efficient products and awarded them "Top Runner". It is a

reputational reward rather than monetary benefits.

The passing of government subsides during 2007-13 resulted in a strong 10% sales

CAGR during the period. These subsides partly front loaded the market demand but also

increased penetration, especially in rural areas. This to some extent explained in the

slower market growth in 2014/15 after the program ended. We believe the market should

normalise in 2H16 and onwards.

In 2016, National Development and Reform Commission published a target that by 2020,

two-level efficiency home appliances need to take up at least 50%. Up to August 2016,

two-level efficiency penetration was 32% for AC. Channel check suggests that one-level

efficiency and two-level efficiency are 35% and 15% more expensive than three-level

efficiency ACs , which implies 4% ASP for ACs.

In our view, large brands such as Midea, Haier, and Gree with high production standards

and large R&D investments will benefit from energy-efficiency trends.

26 October 2016


Figure 30: Government subsidy programs

Time Subsidy Program Applicable products Size

Dec 2007 - Jan 2013 Home appliance to rural (家电下乡） TV, white goods, mobile phone, PC Cumulative sales over Rmb 720bn and sales

volume of ~300mn units

Jun 2009 - Dec 2011 Old for new program (以旧换新） TV, white goods, PC stimulated over Rmb340bn home appliances

consumption

June 2009 - May 2011 Energy saving subsidy (节能惠民） AC, auto, light, motor, etc. stimulated over Rmb70bn home appliances

consumption

June 2012 - May 2013 New energy saving subsidy (新节能惠民） TV, white goods, water heater stimulated over Rmb250bn home appliances

consumption

Nov 2015 - current Top runner (领跑者） White goods that meet the most stringent

energy saving standards

NA


Figure 31: Room to grow for energy-efficient

products

Figure 32: One-level and two-level efficient products

have 35% and 15% price premium

Source: NDRC, CMM Source: CMM,

50%

32%

0%

10%

20%

30%

40%

50%

60%

Government target Current penetration 0

20

40

60

80

100

120

140

160

3-level efficiency 2-level efficiency 1-level efficiency

price index

26 October 2016


AC: The worst is over, manufacturing sales picking up

With the inventory overhang situation largely over and central AC demand picking up, we

believe the AC sector is ready for a 5% CAGR over 2016-18 at the retail level. Based on

the Jul-Sep IOL data, China domestic AC shipments increased 16%/23%/37% from a low

base versus 32%/10% decline in 1H16 and 2015. Our discussions with major AC

manufacturers suggest a strong expected rebound in AC manufacturing sales in 2H16 and

1H17 driven by low base and solid retail demand.

Market highly concentrated led by Gree

Currently, the market size of AC is around Rmb137 bn, which is 175% and 57% larger

than washing machines and refrigerators, respectively. The market is highly concentrated,

with top three leaders taking 68% share. By value, Gree is the No.1 player with 33%

market share, followed by Midea at 25% and Haier at 11%.

Domestic and foreign brands are priced at similar levels, which to some extent reflect

refined technique and well-established brand image for domestic players. Among domestic

players, Gree has the largest price premium due to strong branding.

Figure 33: AC market size growth

Figure 34: Market breakdown by retail volume

(8M16)

Source:IOL, Credit Suisse estimates Source: CMM

Figure 35: Market break down by retail value (8M16)

Figure 36: Gree has 15% price premium due to

branding


-12%

-6%

0%

6%

12%

18%

24%

30%

36%

42%

0

20

40

60

80

100

120

140

160

2009 2010 2011 2012 2013 2014 2015

AC market size (LHS) YoY chg (RHS)

Rmb bn

Error! Use the Home tab to apply Report Date to the text that you want

to appear here.

Gree29%

Midea24%

Haier10%

Hisense6%

Aux5%

TCL4%

Chigo5%

Whirpool3%

Others14%

Gree33%

Midea25%

Haier11%

Hisense6%

Aux4%

TCL2%Chigo

3%

Whirpool2%

Others14%

178

115 105 102 102 100 100 95

86 77 73 73

60 49

0

20

40

60

80

100

120

140

160

180

200

Misubishi

Gree

Haier

Foreign

Midea

Industry

Dom

estic

Hisense

Aux

Kelon

Chigo

Whirlpool

TC

L

Electrolux

26 October 2016


Destocking has largely completed

With record-breaking hot weather in summer 2016 and the aggressive destocking by

leading players since 2Q15, we believe AC inventory level should see significant

improvement after August. Current inventory level is around 26 mn units, compared to 40

mn units a year ago (down 35% YoY and also 10% below the end of summer inventory

level in 2014). Companies are trying to reduce to three-month inventory versus four-/five-

month now, which we believe will take another one to two quarters to achieve.

AC domestic sales volume grew 16%/23%/37% over July-Sep, after 13 months of

consecutive decline. Surging sales brought down more than 10 mn units of inventory

between August 2015 and July 2016.

Companies continue to rationalise their inventory level by reducing shipments to

distributors and shortening production cycle. We believe the destocking process will

continue to help new product sales and increase ASP and margin subsequently.

Figure 37: AC sales surged in June/July this year

Figure 38: Inventory has decreased more than 10mn

units

Source: IOL Source: CMM, IOL, Credit Suisse estimates

Figure 39: Channel inventory problem has improved significantly from 2H15 to

1H16

Source: IOL, CMM, Credit Suisse estimates

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

100

200

300

400

500

600

700

800

900

1,000

Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16

Domestic shipments YoY change

mn units

30

40

26

-

5

10

15

20

25

30

35

40

45

2014 Jul 2015 Jul 2016 Jul

mn units

-

100

200

300

400

500

600

700

800

900

1,000

Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16

Shipments Retail sales volume

10K units

Destocking

Stocking

CMM, IOL, Credit Suisse estimates

26 October 2016


Central AC—domestic brands catching up

Central AC market is around Rmb69 bn. We expect central AC to witness a 7% CAGR in

the next three years, slightly faster than household ACs. Domestic leading brands such as

Midea, QD Haier and Gree should enjoy faster growth due to market share gains.

Foreign brands still dominate the market at this stage, but domestic brands are capturing

market share rapidly. We see the domestic brand share increasing gradually from 34% in

2014 to 45% in 1H16.

A central AC has more elegant display than a traditional one and does a better job in

matching overall in-house decoration. It is also more energy-efficient, which coincides with

the consumption trend and government guidance. Individual housing, commercial areas

including offices, shopping malls, subways, etc., can use central ACs.

Daikin, Midea and Gree are the leading brands with 18%, 17% and 16% market share,

respectively. We expect the central AC business to outgrow the residential business for

Midea and Gree's, as the central AC business has high entry barrier and requires strong

reputation.

Figure 40: Midea, Daikin, Gree led central AC market Figure 41: Domestic brands gaining market share

Source: IOL Source: Aircon.con

Washing machine/refrigerator—stable growth driven

by replacement needs and export sales

Washing machine and refrigerator are mature segments with less growth potential due to

high penetration. Segment growth will be mainly driven by replacement needs and export

sales. We expect replacement needs to increase starting from 2017, as sales boosted by

government subsidies programs in 2007-13 will enter into the replacement cycle. Strong

export sales is another growth driver, as domestic brands are stronger and develop better

sales channels overseas. We see washer/refrigerator record 4%/9% export sales growth

YTD.

QD Haier is No.1 in both segments, with 27%/28% market share in washer/refrigerator.

We expect its leading position to remain, backed by mid-to-high end position in the context

of consumer trade-up and strong presence in smart appliance. Starting in late 2015, QD

Haier also launched more SKUs with price below Rmb2,000 for washer/refrigerator to take

shares of customers who are more price sensitive.

Daikin+McQuay18%

QD Haier7%

Midea17%

Gree16%

York5%

Carrier4%

Hitachi8%

Others25%

34%

45%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2011 1H16

26 October 2016


Figure 42: Washing machine market share (8M16 in

value) Figure 43: Refrigerator market share (8M16 in value)


Figure 44: Refrigerator has 9% export growth YTD

(volume)

Figure 45: Washer has 4% export growth YTD

(volume)

Source: IOL Source: IOL

Haier27%

Little Swan17%

Midea5%

Siemens14%

Sanyo6%

Panasonic8%

Hisense2%

Samsung5%

Others16%

Haier28%

Midea11%

Rongsheng11%

Meiling9%

Hisense4%

Siemens12%

Xinfei2%

Electrolux1%

Others22%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

50

100

150

200

250

300

350


Sales volumn YoY

10k units

-30%

-20%

-10%

0%

10%

20%

30%

40%

0

20

40

60

80

100

120

140

160

180


Export sales volume (LHS) YoY (RHS)

10k units

26 October 2016


Upgrade drives GPM, raw material is controllable

In general, home appliance companies' GPM has been rising in the past few years driven

by higher ASP from stronger branding and product mix enhancement, cheaper raw

material costs, efficiency enhancement and economies of scale. Among the key

categories, kitchenware saw the highest margin expansion driven by consumption

upgrade, followed by AC, refrigerator, and washing machine.

Raw material cost accounts for about 70% of COGS for white goods. Major raw materials

include plastic, steel, copper, and aluminum. Comparing prices in 2013 versus now,

copper/aluminum, cold-rolled steel, stainless steel and polypropylene have decreased by

28%, 12%, 26%, 23%, and 43%, respectively. We see a slight raw material price increase

since 2016, but still within the historical low range.

We conducted a sensitivity analysis on the raw material hike impact to white goods GPM

and summarised on the table below. Overall, we believe that raw material is a controllable

risk. In the worst case scenario, where all raw material prices go up together (which in our

view is highly unlikely based on historical trend), we estimate that a 1% ASP increase can

offset a 2% increase in overall raw material prices (see figure 48).

As the white goods market is highly concentrated and all major players are listed

companies, we expect the white goods companies to likely raise prices to pass through

cost pressure to end consumers.

Overall, we expect the industry ASP to increase by 3% per annum driven by the positive

factors that we discussed above. We continue to see industry GPM to slightly increase

going forward and raw material should be a controllable risk, in our view.

Figure 46: GPM of our coverage companies

Company Ticker 2013 2014 2015 2016E 2017E 2018E

Midea 000333.SZ 23% 25% 25% 30% 33% 33%

Gree 000651.SZ 23% 25% 25% 30% 33% 33%

QD Haier 600690.SS 25% 27% 28% 29% 30% 30%

Haier Electronics 1169.HK 15% 15% 16% 17% 17% 17%

Robam 002508.SZ 54% 57% 58% 60% 60% 60%

Joyoung 002242.SZ 34% 33% 32% 33% 32% 32%


Figure 47: GPM sensitivity to the change in raw materials and ASP

Gross margin chg (%)

Factor change AC Washing machine Refrigerator

Plastic -0.07 -0.11 -0.18

Copper -0.17 -0.04 -0.11

Steel -0.15 -0.32 -0.18

Labor -0.08 -0.09 -0.09

ASP 0.68 0.7 0.71


26 October 2016


Figure 48: AC COGS breakdown Figure 49: Washing machine COGS breakdown

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

Figure 50: Refrigerator COGS breakdown Figure 51: Copper/aluminum price trend

Source: Company data, Credit Suisse estimates Source: CEIC

Figure 52: Steel and plastic price trend Figure 53: Raw material price YoY change

Source: CEIC, Thomson Reuters Datastream Source: CEIC, Thomson Reuters Datastream

Steel22%

Plastics10%

Copper25%

Labour12%

Others31%

Steel44%

Plastics15%

Copper6%

Labor13%

Others22%

Copper15%

Steel25%

Plastics25%

Labor13%

Others22%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2011 2012 2013 2014 2015 2016

Copper aluminum

Rmb/ton

0

5,000

10,000

15,000

20,000

25,000

30,000

2011 2012 2013 2014 2015 2016

Stainless steel Cold rolled steel Polypropylene

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

2012 2013 2014 2015 2016

Copper YoY Aluminum YoY Polypropylene YoY

Stainless steel YoY Cold rolled steel YoY

26 October 2016


Slight margin premium over international brands is sustainable

Compared to the global brands, China white goods sector GPM/OPM was 28%/7%,

compared to 27%/6% for the international players. In our view, the slight margin premium

for the domestic brands is attributed to: (1) almost 100% in-house production, (2)

economies of scale and (3) stronger bargaining power against the channel operators.

Domestic brands manufacture almost 100% in-house and they also do OEM/ODM for

international companies. Meanwhile, their production scales are also larger than many

international brands which lead to stronger raw material power and production efficiency.

On the channel front, for domestic players only 20% of sales are contributed to chain

channels (such as Gome and Suning), while the rest of the sales go towards distributors

and e-commerce platform. In contrast, chain channel is the dominating channel for

international brands, where channel players have stronger bargaining power. This partly

explains the slightly lower OPM for the international brands.

Based on our discussions with industry players, OPM for e-commerce, traditional

distribution and key accounts (chains stores such as Gome and Suning) are similar, while

kitchenware companies generate higher OPM from e-commerce channel as they are self-

operated. Looking forward, we expect e-commerce and traditional channels to be growing

faster than key accounts channel as: (1) the young generation tends to shop online and (2)

e-commerce is under-penetrated in rural areas. We believe the channel changes are

neutral to white goods companies but are positive to kitchenware players as higher sales

mix from e-commerce will increase group GPM.

Export margin is expanding

We expect overseas sales to contribute a larger percentage to white goods companies'

revenue and have higher margin going forward. Majority of the revenue increase is driven

by acquisitions of international brands, which makes similar margin to the existing

business. We see room for margin expansion from sourcing and production synergies. For

the pure export business, their NPM is around half of the domestic business, but their

GPM has been improving from 2012 to 1H16. We expect the rising trend to be sustainable

because of: (1) higher sales mix from better margin OBM model (from ODM/OEM) as

Chinese brands are having stronger brand image globally, (2) RMB depreciation which

also boosted export GPM as export prices are mainly settled in USD and (3) overall export

ASP which has been rising as Chinese players' quality and technology are

becoming better.

26 October 2016


Figure 54: Chinese companies have slight margin

premium over international brands

Figure 55: Export GPM is expanding for domestic

white goods players

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

Note: 1H2016 data for QD Haier is not available. 2015 leap for QD Haier is mainly due to revenue calculation method change

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

GPM OPM NPM

China International

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2012 2013 2014 2015 6M2016

Gree Midea Haier

26 October 2016


China white goods giants eyeing global With overseas M&A, asset injection from parent companies, and increasing OBM shares,

overseas markets are increasingly becoming important for Chinese white goods giants. In

2015, overseas market accounted for 21%, 40%, and 15% of QD Haier, Midea and Gree,

respectively, and we expect it to expand to 45%/55%/25% in 2017.

At present, we see limited overseas exposure in kitchenware brands due to different

dietary habits. Meanwhile, the kitchenware companies are relatively smaller versus the

white goods giants with less capex for overseas acquisitions.

While overseas GPM is much lower than domestic market at present, we expect overseas

gross margin to trend upwards due to better pricing power, channel expansion, and brand

building. With recent overseas acquisitions e.g. Toshiba, KUKA and GE, we expect more

synergies will kick in and further boost export sales and margin in the future. We will

provide more details in our company discussions.

Figure 56: White goods export sales share picked

up since 2015 Figure 57: Leading brands export share increases

Source: IOL Source: Company data, Credit Suisse estimates

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2011 2012 2013 2014 2015 8M2016

AC Washing machines Fridge

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2010 2011 2012 2013 2014 2015 6M2016

Gree Midea QD Haier

26 October 2016


Figure 58: Export margin improved for Midea, Gree, and QD Haier

Source: Company data

Note: 1H2016 data for QD Haier is not available. 2015 leap for QD Haier is mainly due to revenue calculation method change

From OEM to OBM

Looking forward, home appliance companies will focus on expanding their own branding

business overseas as their technology and R&D are now comparable or exceeded

international companies after many years of development. Meanwhile, companies can also

leverage on their overseas acquisitions' channel to launch their brands.

In 1H16, overseas accounted for 30% of the leading white goods companies sales, of

which around 30% were own brand sales (OBM) with the rest being ODM and OEM. Haier

was the exceptional case with all its overseas sales coming from the OBM business. Its

core markets are SE. Asia and African countries.

At present, OBM does not have a huge margin advantage over ODM and OEM as Chinese

brands have relatively low brand premium in overseas market. However, OBM is crucial for

brand establishment and beneficial for higher margin in the long run.

Figure 59: Midea has the highest overseas revenue share

(1H16) Overseas revenue % GM of export business * OEM% of export sales

Midea 43.8% 24.8% 1/3

Gree 24.2% 21.2% 1/3

QD Haier 28.7% 17.3% All own brand sales

Joyoung 1.9% 24.2% All own brand sales

Robam 1% na na


Overseas volume growth driven by M&A

Besides overseas OBM and ODM, almost all major domestic brands have initiated M&A to

expand their overseas business. We see good export business upside as cost synergies

will kick in through sharing R&D/sourcing and product offering expansion. By acquiring

local brands, domestic manufacturers are able to utilize local production landscape and

leverage sales network of acquired brands.

Midea acquired Toshiba's white goods section in early 2016, which will increase Midea's

turnover by 5-10% going forward. QD Haier acquired GE appliances in January 2016,

which will increase its turnover by 25-45% starting from 2H16. We expect two to three

years for these international brands to be fully integrated into parent-co and realise

maximum synergies. The below table summarises the recent overseas acquisitions.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2012 2013 2014 2015 6M2016

Gree Midea Haier

26 O

cto

be

r 201

6

Ch

ina H

om

e A

pp

lian

ce

Sec

tor

26

Figure 60: Recent domestic brands M&A

Ticker Time Target Sector Consideration Financing Current Stage

600060 CH 7/31/2015 100% of Sharp Mexico TV USD 23.7M; Sharp Mexico 2014 net assets

around RMB345.32M to use "sharp" brand

and all its channel resources in America

Internal resources Completed

000333 CH 3/17/2016 80.1% of Toshiba White goods Sector

(Japan)

Appliances JPY53.7B for 40 yrs trademark authorisation

rights & over 5K patents

Internal resource & debt

financing

Completed in June, Financial statements

consolidated in 1H16

5/26/2016 KUKA (Germany) Robotics EUR115/shr, 35% premium to stock price;

EUR 3.7B if transaction complete

Internal resource & debt

financing

Pending reviews; deal will complete in March

2017 at the latest; 81.04% agreed to sell

+13.51% original stake=94.55% share in total if

complete

6/21/2016 80% of Clivet (Italy) Central AC specific consideration not disclosed; 2015

Clivet sales is EUR120M -3% of European

chillers

No disclosure Definitive agreement assigned, pending anti-

monopoly reviews; expect to complete before

2016 YE

600690 CH 1/14/2016 GE Appliances Sector (US) Appliances USD 5.58bn, 10x EV/EBITDA internal resources & USD3.3B

loan from Chinese development

bank

Conducting audit on target assets; board

meeting/US/Mexica competition premerger office

approved

7/28/2011 White goods section in Japan and

Indonesia of Sanyo (Japan)

Home Appliances JPY 10B No disclosure Completed, was injected to QD Haier in 2015

9/10/2011 80% of Fisher& Paykel (New Zealand) Home appliances 9.87 NZD; 12.56x EV/EBITDA, 1.53x P/B No disclosure Completed, plan to inject assets to QD Haier in

2020

751 HK 6/10/2014 Sinoprima (South Africa) TV/ display monitor Rmb30M for net asset negative Rmb62M net

asset

No disclosure Completed

5/7/2015 METZ (Germany) partial asset

including LCD/LED TV sections

TV no disclosure No disclosure Completed

9/25/2015 Toshiba Appliances no specific number for 5% of Toshiba Nanhai

& Toshiba Shenzhen companies

No disclosure Completed

12/21/2015 Toshiba Consumer Products

Indonesia factory

TV/Washing machines USD25M-30M, no specific disclosure No disclosure Completed on May 16, 2016, but Midea acquired

Toshiba white goods sector later so co-operation

with Toshiba may not continue

00810 CH 7/21/2015 Strong Media (Europe) TV set up boxes EUR 30M Offshore bank financing Completed

2317 TW started in 2012

and completed

in 2016

Sharp (Japan) TV JPY 88B (about USD3.5B) for 66% of Sharp No disclosure Completed in March 2016

300172 CH 7/26/2016 Vizio (US) Smart TV USD2B No disclosure Completed

1070 HK 3/31/2014 90% Stake of Sanyo Mexico Electronic products USD15.22M Internal resource Completed

Source: Company data, Credit Suisse

26 October 2016


Kitchenware: a fast-growing segment In 2015, kitchenware market revenue was Rmb11.6bn (built-in kitchenware and kitchen

small appliances), representing 18% of the total home appliance market. We believe that

kitchenware is at fast growing stage with a 9% CAGR backed by: (1) a low penetration

rate; (2) population growth and aging problems; and (3) an increase in health awareness.

Among the domestic players, we like Robam due to its high-end position, strong pricing

power and a dominant market share in built-in large kitchen appliances. We also like

Midea for its broad product categories within small appliances.

Huge long-term growth potential

We believe that the kitchenware market is in a growth stage, similar to the white goods

market from 2009-13 when volume saw a CAGR of more than 10%.

From 2009-13, the white goods segment bred three home appliances giants: Midea, Haier

and Gree. In our view, the fast-growing kitchenware segment may breed new home

appliance leaders in the next few years. Small lifestyle appliances and other new

segments, such as household robots, also have great growth potential, but since the

segment is relatively small at this stage, giants are unlikely to emerge.

Kitchenware penetration is very low

The kitchenware segment has low penetration compared to white goods. In 2015

penetration rates for cooker hoods and other small kitchen appliances in China were 35%

and 31.4%, respectively, while AC and washer penetration was 80-90%.

Compared with developed countries, dishwashers and ovens have penetration rates of

0.2/0.1% in China, while Germany has 67.3%/73.3% and the UK has 44.8%/64.2%. This

suggests that many globally mature kitchenware products in the west have limited or

almost no presence in China. In our view, lifestyle improvement and urbanisation will drive

kitchenware penetration.

Figure 61: Kitchenware has low penetration compared to white goods in China

Source: Euromonitor, Credit Suisse estimates

-

10

20

30

40

50

60

70

80

90

Small kitchenappliances

Cooker Hoods Washing machines Air Conditioners

%

26 October 2016


Figure 62: China kitchenware penetration lags developed countries

2015 penetration rate

(%)

China US France Japan Germany UK

Dishwashers 0.2 63.1 44.9 18.7 67.3 44.8

Ovens 0.1 10.3 38.1 3.5 73.3 64.2

Microwaves 22.8 84.9 86.2 84.5 71.8 91.5

Food processor 24.9 170 124.3 29.5 103 98.3

Coffee Machines 0.1 154.6 103.6 7.6 95.6 50

Source: Euromonitor

Aging population and two child policy drive kitchenware demand

In our view, the two-child policy and aging problems will contribute to kitchenware sector

growth. Babies and elderly require additional care due to food safety issues in China. We

expect new-born babies and the aging population to require more in-home cooking thus

benefiting kitchenware sales.

According to our in-house estimates, the two-child policy will bring an additional 3-5 mn

babies from 2017 onwards, assuming an annual application rate of 5-10% for the currently

eligible 60 mn couples. This means a population boost of 17-33% from the current 16.5

mn new-born babies per year from 2017 onwards.

China's population is aging. In 2015, people aged over 65 years old amounted to 144 mn,

10.5% of the total population. We expect this number to see a CAGR of 5.1% over the

next five years and reach 180 mn in 2020, representing 13% of the total population.

Figure 63: We expect 3-5 mn new babies starting

from 2017E

Figure 64: We expect the elderly population to see a

5.1% CAGR from 2016-20

Source: NBS, Credit Suisse estimates Source: NBS, Credit Suisse estimates

Rising health cautiousness

According to a Boston Consulting Group survey, Chinese consumers have very strong

health awareness, with 73% willing to pay a premium for healthier products, which is 12%

more than the global average.

With increasing food safety issues, in the 2016 BCG survey food safety is the top choice

among all other factors that interviewees were unsatisfied with. Therefore, we see robust

growth of health-related appliances, such as blenders, that can break food cells and slow-

speed juicers that can better maintain fruit nutrition. We see continuous growth in the

kitchenware segment, especially small appliances.

14

15

16

17

18

19

20

21

22

23

2010 2011 2012 2013 2014 2015 2016E 2017E

Born under one-child policy additional babies

mnn

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

-

20

40

60

80

100

120

140

160

180

200

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

People above 65 years old Growth % of total population

13%mn

26 October 2016


Figure 65: Chinese consumers have high health awareness

Source: BCG

Built-in kitchenware and small appliances

We group the kitchenware segment into two sub-sectors: (1) Built-in kitchenware; and (2)

small kitchen appliances.

Built-in kitchenware includes necessities such as cooker hoods and gas stoves. Others

are optional appliances include dishwashers, built-in ovens, steamers, water purifiers, etc.

The overall built-in kitchenware market is valued at around Rmb69 bn, with range hoods

and gas stoves taking 74% of the total market. Leading brands include Midea, Fotile (a

private company), Vatti, Robam and Vanward. Fotile and Robam are at the high end of the

market with the rest focused on the mid- to low-end market.

Figure 66: Selected built-in appliances

Source: Company websites

0

10

20

30

40

50

60

Ove

rall

Food

safe

ty

med

ical

care

Educ

ati

on Life

conv

eni

ence

Envir

onm

ent

Socia

lse

curit

y

Inve

stmen

t

Wor

klife

bala

nce

%

built-in hood stove dish sterilizer built-in steamer

built-in Oven built-in microwave dishwasher water purifer

26 October 2016


Figure 67: Built-in kitchenware market

breakdown(value)

Figure 68: Built-in kitchenware market breakdown

(shipments)

Source: CMM Source: Euromonitior

Figure 69: Range hood market brand share(8M16

value)

Figure 70: Gas stove market brand share

(8M16value)


Small kitchen appliances feature much more selection. The market size is around

Rmb47 bn. Popular appliances include necessities, such as rice cookers and water

heaters, which constitute around 45% of total small appliances. The rest are noodle

machines, soybean makers, juicers, bread makers, etc. Leading brands include Midea,

Supor, Joyoung and Donlim.

By volume, Euromonitor expects small kitchen appliance will to experience a 5% CAGR

from 2016-18E. Given average selling price (ASP) increases, we expect the market size to

see a 9% CAGR.

dishwasher1%

microwave10%

gas stove28%

range hood46%

sterilizer9%

oven6%

2,000 1,900

1,026

787

400

20

-

500

1,000

1,500

2,000

2,500

range hood gas stove microwave oven sterilizer dishwasher

10k units

Robam31%

Fotile28%

Midea12%

Vatti11%

Vanward4%

Macro4%

Siemens6%

Sacon4%

Robam23%

Fotile22%

Midea7%

Vatti12%

Vanward4%

Macro3%

Siemens5%

Others24%

26 October 2016


Figure 71: Selected kitchen small appliances

Source: Company websites

Figure 72: Small kitchen appliance breakdown by

value Figure 73: Small appliance brand share

Source: CMM, Credit Suisse Source: CMM, Credit Suisse

Figure 74: selected kitchen small appliances brand share

Rice cooker Electric

kettle

Pressure

cooker

Induction

cooker

Soymilk

machine

Electric pot Juicer Blender Baking pan

Midea 41% 30% 42% 46% 21% 26% 24% 31% 40%

Joyoung 27% 21% 28% 19% 14% 11% 16% 7% 21%

Supor 14% 20% 19% 21% 62% 11% 44% 49% 16%

Others 18% 29% 11% 14% 3% 52% 16% 13% 23%

Source: Company data, CMM

deep fryer coffee machine soybean machine water heater

rice cooker induction cooker pressure cooker electric pot

Rice cooker32%

Induction cooker16%

Pressure cooker13%

soymilk maker12%

juicer9%

electric kettle8%

Blender5%

coffee machine3%

Others2%

OUTPERFORM

Midea41%

Joyoung27%

Supor14%

Others18%

26 October 2016


Consumers are trading up

We expect ASPs to see a 5% CAGR from 2016-18E as consumers trade up to high-end

functional products We see more room for ASP increases in kitchenware than the

traditional white goods segment due to more new model launches and more obvious

market consolidation. In short, kitchenware is still in a growing phase.

Kitchenware ASPs have surged 20-30% in the past four years. In the built-in-kitchenware

segment, consumers are more inclined to buy high-end products with high air flow rates,

low noise and modern appearance. In the small appliance segment, we see major

upgrade progress in rice cookers from non-induction heating (IH) to IH due to rising

requirements by Chinese for food quality.

The high-end market is expected to benefit most from this trend. Premium brands Fotile

and Robam expanded their market share from 25% in 2008 to more than 40% in 2015. We

continue to see market share gains from high-end brands and prefer Robam.

Figure 75: Kitchenware ASPs have been rising

steadily from 2012

Figure 76: High-end brand market share has

increased

Source: CMM, Credit Suisse estimates Source: CMM

Range hoods: European style and high air flow rates

We see rising interest in European-style hoods with large air flows. European-style hoods

are stylish with a modern appearance. The market share increased to 48% in 2016 from

42% in 2012. Moreover, European-style range hoods have a 16% price premium.

Due to different cooking habits, Chinese families have a greater demand for higher air flow

rates, or suction power, than Western families. Usually a 15-17m3/min air flow rate is

enough for a normal Chinese family. As consumers have higher living standards, we see

the market shares of range hoods with above 17m3/min suction power rising to 40% in

2016 from 15% in 2012. Given their stronger functionality, they are priced at a 25%

premium over the market average.

-

500

1,000

1,500

2,000

2,500

3,000

2012 2013 2014 2015 6M2016

Gas stove Range hood Sterilizer

Rmb

28%

48%

25%

43%

0%

10%

20%

30%

40%

50%

60%

2008 2015

Range hood total share Gas stove total share

26 October 2016


Figure 77: European-style range hoods are the most popular

Source: Company website

Figure 78: Rising interest in European-style range

hoods

Figure 79: Large suction powered range hoods rise

rapidly


Figure 80: High-end products have ~20% premium over the industry average

Suction power Price Price premium Style Price Price premium

Industry average 2,853 0% Industry average 2,853 0%

<13 m3/min 1,134 -60% Flat 1,261 -56%

13-14.9 m3/min 1,610 -44% Deep cover 954 -67%

15-16.9 m3/min 2,984 5% Inclined 2,804 -2%

>17 m3/min 3,529 24% European 3,322 16%

Source: CMM

Rice cooker—upgrade to IH

Rice cooker is the largest category in the small appliance sector with a Rmb15 bn market

size and 32% of market sales. Consumers are upgrading to IH rice cookers, which have

witnessed 6.7% and 14.7% growth in volume and value, respectively, in 2015. We expect

market size will continue to see a 13-15% value CAGR from 2016E-18E. Value growth is

expected to be significantly faster than volume growth, as the price of an IH rice cooker is

more than double a normal rice cooker.

IH uses induction to heat rice and thus improve rice texture. The IH rice cooker market in

China only started in 2013 but has already taken a 13% market share.

European style Inclined style Deep covered style Flat style

42% 45% 46% 48%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 6M2016

European style Inclined style Chinese style Flat style

15% 19%25%

34%40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015 6M2016

>17 m3/min 15-16.9 m3/min 13-14.9 m3/min <13 m3/min

26 October 2016


Figure 81: Rice cooker sales volume to see a 6%

CAGR from 2016E-18E

Figure 82: IH rice cookers are gaining market share

rapidly

Source: Euromonitor, Credit Suisse estimates Source: CMM, Credit Suisse estimates

IH rice cookers have a large price premium over basic rice cookers. IH products retail for

more than Rmb800, compared to Rmb250 for normal cookers. Product upgrades to IH rice

cookers have already led overall industry ASP increases of 8%/10% YoY in 2014/2015.

We see much room available for ASP increases as prices in China lag those in Korea and

Japan by 70% and 80%, respectively.

Leading producers are Midea, Joyoung and Supor. We like Midea for its large market

presence in the rice cooker segment.

Figure 83: IH rice cookers have more than a Rmb500

price premium over basic ones Figure 84: Rice cooker ASPs are increasing rapidly

Source: CMM, Credit Suisse estimates Source: Euromonitor

0%

2%

4%

6%

8%

10%

12%

-

10

20

30

40

50

60

70

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

mn units

6.7%

12.6%

21.1%

32.6%

0%

5%

10%

15%

20%

25%

30%

35%

2014 2015sales volume sales value

0

100

200

300

400

500

600

700

800

900

Basic rice cooker IH rice cooker

Rmb

279293

315

345

0%

2%

4%

6%

8%

10%

0

50

100

150

200

250

300

350

400

2012 2013 2014 2015

mn units

26 October 2016


Figure 85: ASPs still have large room to grow

Figure 86: Midea has the largest rice cooker market

share

Source: Euromonitor Source: CMM

Market consolidation to continue

We have seen market consolidation in kitchenware in the past two years. The top-three

brands (in terms of volume) in both imbedded built-in kitchenware and small appliances

saw 3-6% market share gains from 2014-15.

We see faster consolidation in the imbedded built-in kitchenware segment due to relatively

low concentration. The market is scattered with more than 300 players. The top-three

brands only have a 40-45% market share, lagging the white good market's 55-65%.

In this consumption upgrade era, we expect leading brands with strong R&D capability and

premier product quality to stand out and continue to expand market share. Many

uncompetitive brands will be filtered out, in our r view.

Figure 87: We have seen market consolidation in

the past two years

Figure 88: We see further consolidation from the

built-in kitchenware segment


34

57

119

170

0

20

40

60

80

100

120

140

160

180

China Hong Kong Korea Japan

USD/unit

Midea

41%

Joyoung

27%

Supor

14%

Others

18%

40%36%

48%

76%

65%

43%39%

46%

82%

71%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Range hood Gas stove Sterilizer Rice cooker Electric kettle

2014 2015

64%

53%50%

45% 44%40%

0%

10%

20%

30%

40%

50%

60%

70%

AC Washing machine Fridge Sterilizer Range hood Gas stove

26 October 2016


Top picks: Midea, Robam and Gree Consumers are trading up in the home appliance sector, which has accelerated industry

consolidation. We believe that the segment leaders, which have reputable brand names,

solid channel execution and strong R&D capability, will stand out from peers. With this

sector report, we assume coverage on four white goods companies—Midea

(OUTPERFORM), Gree (OUTPERFORM), QD Haier (OUTPERFORM), Haier Electronic

(NEUTRAL) and initiate on two kitchenware companies—Robam (OUTPERFORM) and

Joyoung (Neutral).

Our top Buys are Midea, Robam and Gree. We like: (1) Gree for its attractive valuation

of 8.6x P/E (5x ex. cash P/E), 8% dividend yield and accelerating CAGR growth of 11.3%

for 2016-18 vs. a 7.4% CAGR for 2014-16; (2) Midea for its strongest earnings outlook

with a 14.8% CAGR (0.8x PEG) and well-diversified product categories; and (3) Robam for

its fastest growing outlook—a 28% EPS CAGR in 2016-18 backed by its market share

gains in the fast-growing kitchenware segment.

We rate Joyoung and Haier Electronic NEUTRAL, as we expect their earnings outlooks to

be largely in line with the industry and their valuations and dividend yields are not

attractive which cap their share price upside.

Figure 89: Revenue breakdown of our coverage companies

Company Ticker Revenue breakdown Export %

AC

Washer

Refrigerator

Water heater

Kitchenware and

small appliance

Midea 000333.SZ 43.8% 9.5% 8.6% 0.3% 26.1% 43.8%

Gree 000651.SZ 83.8% 0.0% 1.0% 0.0% 1.5% 24.0%

QD Haier 600690.SS 19.5% 16.5% 29.3% 5.0% 2.3% 29.0%

Haier Electronics 1169.HK 0.0% 18.0% 0.0% 7.0% 0.0% 4.0%

Robam 002508.SZ 0.0% 0.0% 0.0% 0.0% 98.0% 2.0%

Joyoung 002242.SZ 0.0% 0.0% 0.0% 0.0% 97.0% 2.0%


Figure 90: Valuation comp of our coverage companies

Company Name CS Ticker Rating Last Price TP Upside Mkt Cap Trd vol CAGR PE PE PEG PB ROE DY

/Downside US$mn US$ mn 16-18E 2016E 2017E 2017E 2017E 2017E 2017E

Qingdao Haier 600690.SS O 10.3 12.3 19.6% 9,249 40 15.0% 12.4 10.8 0.9 2.0 19% 2%

Midea Group Co 000333.SZ O 26.8 34.5 28.7% 25,407 128 14.8% 11.7 10.1 0.8 2.4 24% 4%

Gree Electric 000651.SZ O 23.0 28.0 21.6% 20,442 138 11.3% 9.5 8.7 0.8 2.4 27% 8%

Haier Electronic 1169.HK N 12.5 13.4 7.0% 4,487 6 10.3% 15.1 13.7 1.5 2.0 15% 1%

Robam 002508.SZ O 38.6 50.3 30.3% 4,157 25 28.2% 23.9 18.4 0.8 5.5 30% 2%

Joyoung Co 002242.SZ N 19.9 21.5 8.0% 2,255 15 11.5% 22.1 19.7 1.9 4.0 20% 4%


Investment recommendations

■ Midea Group (00033.SZ, OUTPERFORM, TP: Rmb34.50). We initiate on Midea with

an OUTPERFORM rating and target price of Rmb34.50. Excluding acquisitions; we

believe Midea will be the fastest-growing large appliance company driven by a strong

sales outlook for the washing machine, refrigerator and small appliance segments. We

see margin upside from rising automation and efficiency enhancement. Toshiba's

acquisition helps Midea to quickly enter the Japan market and enhance its technology.

We expect this business to contribute earnings in 2017. We forecast 15% earnings

growth for 2016-18E. The valuation appears attractive at 10.2x 2017E P/E (6.8x ex.

26 October 2016


cash P/E), a slight discount to the China white goods sector despite its above-industry

earnings growth and ROE. Its 3% dividend yield also appears attractive.

■ Gree (000651.SZ, OUTPERFORM, TP: Rmb28). We initiate on Gree with an

OUTPERFORM rating and TP of Rmb28. We like Gree for its cheap valuation and

dividend yield. Gree is trading at 8.6x 2017E P/E, a 20% discount to the white goods

sector. With net cash equivalent to 40% of market cap, the stock is trading at 5x ex.

cash P/E. Gree's 8% dividend yield is the highest in the whole consumer appliance

industry. We believe that the AC sales recovery starting in 2H16 will drive share price

and P/E multiple expansion. We have a mixed view on the Yinlong acquisition. This

acquisition helps Gree enter the fast-growing and high-upside new energy vehicle

market, but this transaction is expected to be EPS dilutive at least for the next five

years and result in significant 24% share dilution.

■ QD Haier (600690.SS, OUTPERFORM, TP: Rmb12.30). We initiate on QD Haier with

an OUTPERFORM rating and TP of Rmb12.30. We like the company for its influential

global branding, solid earnings CAGR outlook of 15% for 2016-18 and undemanding

valuation. The inclusion of GEA has significantly lifted its presence in North America.

■ Haier electronic (1169 HK, Neutral, TP: HK$13.40). We initiate on Haier Electronic

with a NEUTRAL rating (OUTPERFORM previously) and a TP of HK$13.40 based on

industry average 11x P/E. While we expect ICS revenue will return growth in 2H16 on

better retail sales, 2017 earnings are expected to see moderate growth of ~10%, which

is slower than other white goods companies. At 11x 2017E P/E (1x PEG), and 2% yield,

valuations do not appear attractive, in our view.

■ Robam (002508.SZ, OUTPERFORM, TP: Rmb48.30). We initiate coverage on Robam

with an OUTPERFORM rating. Robam is our top pick in the kitchenware sector, given

its strong earnings growth outlook and undemanding valuation. It also trades at the

industry’s average valuation yet has the highest market shares, industry-best margins,

ROE and earnings outlook. We forecast a 28% earnings CAGR over 2016-18E driven

by a 22% sales CAGR which is much faster than the industry’s estimated average 9%

CAGR.

■ Joyoung (002242.SZ, Neutral, TP Rmb21.50). We initiate coverage on Joyoung with

a NEUTRAL rating. In our view, the company is in the middle of a category transition

phase which will likely to cap its earnings growth and reduce visibility in the next two

years. We expect 11% earnings growth for 2016-18, slower than industry peers’. Its

valuation is not cheap, at 1.8x 2017E PEG, but its 3% dividend yield, one of the

industry’s best margins and ROE should provide good share price support, in our view.

Sector valuation

China’s consumer electronic sector now trades at 14x forward P/E (market cap weighted),

which is largely in line with its five-year average. The industry comprises different sub

sectors, including white goods, TV, kitchenware as well as small electronic appliances.

The sector de-rated sharply from its 26x at the market peak in May-June 2015. This sharp

derating was attributed to the weak A and H stock markets as well as weak white good

company performances in 2015/1H16 due to the negative impact from AC destocking.

By sub-sector, the white goods and kitchenware sectors are trading at 11x P/E and 19x

P/E, respectively. Investors have awarded the kitchenware sector a higher multiple given

its stronger long-term prospects.

As discussed in our industry session, the kitchenware sector is in a growing phase while

the white goods sector has reached a mature phase. We expect the kitchenware industry

to see a 9% revenue CAGR from 2016-18E which is faster than the white goods sector’s

26 October 2016


3-5% for the same period. Based on consensus as well as our forecasts,

kitchenware/white goods companies are estimated to deliver 23%/14% earnings CAGRs

for 2016-18 implying a 0.9x/0.8x PEG for the respective segments.

Figure 91: China’s consumer electronic sector now trades at 14x forward P/E

Source: Bloomberg, Credit Suisse estimates

Figure 92: Kitchenware sector trades at 19x P/E Figure 93: White goods sector trades at 11 P/E

Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates

Target price and valuation

Our valuation basis is forward P/E multiple and our valuation base year is 2017E. In

general, we set our target P/E multiple with reference to industry average and cross check

with PEG (e.g. 1x PEG). We assign a higher multiple (e.g., one standard deviation above

industry average) to companies that have stronger earnings outlook and ROE. For

companies that are expected to deliver market average earnings growth, margin and ROE

are assigned to industry P/E.

We valued white goods companies and kitchenware companies with reference to their

respective sector P/E multiples instead of the overall consumer appliance sector multiple.

This is because the kitchenware sector deserves a higher multiple, as this sector is in a

growth phase, while the white goods sector is already at a mature stage with lower

multiples.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Jan10

Apr10

Jul10

Oct10

Jan11

Apr11

Jul11

Oct11

Jan12

Apr12

Jul12

Oct12

Jan13

Apr13

Jul13

Oct13

Jan14

Apr14

Jul14

Oct14

Jan15

Apr15

Jul15

Oct15

Jan16

Apr16

Jul16

Mean: 14

Std: 3.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan

10

Ap

r10

Jul1

0

Oct1

0

Jan

11

Ap

r11

Jul1

1

Oct1

1

Jan

12

Ap

r12

Jul1

2

Oct1

2

Jan

13

Ap

r13

Jul1

3

Oct1

3

Jan

14

Ap

r14

Jul1

4

Oct1

4

Jan

15

Ap

r15

Jul1

5

Oct1

5

Jan

16

Ap

r16

Jul1

6

Mean: 19.3Std: 4.3

Mean -1 std

Mean

Mean +1 std

Mean -2 std

Mean +2 std

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

Jan10

Apr10

Jul10

Oct10

Jan11

Apr11

Jul11

Oct11

Jan12

Apr12

Jul12

Oct12

Jan13

Apr13

Jul13

Oct13

Jan14

Apr14

Jul14

Oct14

Jan15

Apr15

Jul15

Oct15

Jan16

Apr16

Jul16

Mean: 11

Std: 2.3

Mean

Mean +2 std

Mean -2 std

Mean +1 std

Mean -1 std

26 October 2016


Midea (OUTPERFORM, TP: Rmb34.50)

Our target price of RMB34.50 is based on a target 13x 2017E P/E, which is one standard

deviation above the white goods sector. The valuation premium is warranted by its

stronger earnings outlook and above-industry ROE and NPM. At our target price, the stock

would be also trading at 0.8x PEG, which suggests our valuation is not demanding given

the company's earnings growth potential.

Gree (OUTPERFORM, TP: Rmb28)

Our target price of Rmb28 is based on 10.5x 2017E P/E, which is in line with the white

goods sector average. At our target price, Gree would be trading at 1x PEG or only 5x ex.

cash 2017E P/E which suggests our valuation is not demanding.

QD Haier (OUTPERFORM, TP: Rmb12.30)

Our target price of Rmb12.30 is based on a target 13x 2017E P/E, which is based on one

standard deviation above industry average. We believe the valuation is warranted by its

stronger earnings outlook and above-industry ROE and NPM. At our target price, the stock

would be also trading at 0.8x PEG, which appears fair, in our view.

Haier Electronic (Neutral, TP: HK$13.40)

Our TP of HK$13.40 is based on 11x P/E, which is referenced to the white goods sector

average. The earnings CAGR is slower than industry, but its par-to-industry multiple is

justified by its unique integrated channel services (40% of 2017E operating profit), which

has higher long-term prospects than the traditional white goods sector.

Robam (OUTPERFORM, TP: Rmb50.30)

Our TP of Rmb50.30 is based on 24x 2017E P/E, which is one standard deviation over the

kitchenware segment which we believe is justified by its market leadership and best

operating matrices. At our TP, the stock would be trading at 0.9x PEG based on our 28%

2016-18 earnings CAGR, which further justifies our valuation premium with its strong

earnings outlook.

Joyoung (NEUTRAL, TP: Rmb21.50)

Our TP of Rmb21.50 is based on 21.5x 2017E P/E, which is in line with kitchenware

industry players. While Joyoung's earnings outlook is slower than other kitchenware

companies, its higher margin, ROE and dividend yield can justify the stock trading at par to

the industry.

26 October 2016


China Home Appliance Sector through HOLT Lens™ The HOLT methodology uses a proprietary performance measure known as Cash Flow

Return on Investment (CFROI®). This is an approximation of the economic return, or an

estimate of the average real internal rate of return, earned by a firm on the portfolio of

projects that constitute its operating assets. A firm's CFROI can be directly compared

against its real cost of capital (the investors' real discount rate) to see if the firm is creating

economic wealth. By removing accounting and inflation distortions, CFROI allows for

global comparability across sectors, regions and time. It is also a more comprehensive

metric than the traditional ROIC and ROE.

Home Appliance Sector vs China Market Aggregate

HOLT aggregates the economic returns of the Home Appliance sector (using the six

companies covered by Credit Suisse equity research) to show a 15-year perspective of

value creation relative to the broader China market aggregate (ex. Financials).

The CFROI for the Home Appliance sector has improved significantly since 2003, more

than quadrupling from 4% to reach 17% in recent years. This return profile is particularly

impressive considering that the broader China market CFROI has fallen from 7% to 4%

over the same period. The sector has also grown at a much faster pace compared to the

broader market in recent years, as shown in the Asset Growth chart in Figure 93.

The sector also stands out with its conservative market expectations (depicted by the

green dots). While consensus EPS indicates that the sector could continue to earn a high-

teen CFROI in 2016 and 2017, investors are pricing for it to decline to just 10% by 2020. In

contrast, the broader China market is already pricing in a substantial level of CFROI

improvements over the next five years.

26 October 2016


Figure 94: The Home Appliance sector has superior economic returns (CFROI) and higher asset growth

rates

Source: Credit Suisse HOLT Lens TM

Return Drivers

The sector’s CFROI® is mostly driven by higher asset efficiency compared to the broader

market. In recent years, while asset turns have moderated, CFROI has been resilient due

to the strong improvement in operating margins.

26 October 2016


Figure 95: Home Appliance sector CFROI driven by higher asset turns and more recently improving

margins


Peer benchmarking

In Figure 95, HOLT shows the historical and forecast CFROI for each company as well as

the market-implied expectation based on the current share price. While implied CFROIs

are low for all six companies, Gree and Hangzhou Robam stand out in the analysis with

their strong CFROI improvement trend over the past ten years. Credit Suisse equity

research has OUTPERFORM ratings on both stocks.

Midea and Qingdao Haier are the other stocks rated OUTPERFORM in the sector. Both

companies also exhibit an attractive combination of high/improving CFROI, low implied

expectations and stronger price and CFROI revisions in the HOLT model.

Figure 96: Historical, forecast and market implied CFROI by company


26 October 2016


Asia Pacific/China Household Durables

Midea Group Co Ltd (000333.SZ / 000333 CH) Rating OUTPERFORM Price (24 Oct 16, Rmb) 26.66 Target price (Rmb) 34.50 Upside/downside (%) 29.4 Mkt cap (Rmb/US$ mn) 171,289 / 25,289 Enterprise value (Rmb mn) 158,913 Number of shares (mn) 6,425 Free float (%) 55.4 52-wk price range (Rmb) 28.65-17.23 ADTO-6M (US$ mn) 154.5 *Stock ratings are relative to the relevant country benchmark.

¹Target price is for 12 months.

Research Analysts

Raymond Ching

852 2101 7852

[email protected]

Carey Shi

852 2101 7729

[email protected]

Likely the fastest growing white goods giant

■ We initiate coverage with an OUTPERFORM rating and an Rmb34.50

target price. We believe Midea will be the fastest-growing large appliance

company, driven by the strong outlook in washing machine, refrigerator and

small appliance segments. We see margin upside from rising automation and

efficiency enhancement. We forecast 14.8% earnings growth in 2016-18.

Midea has the strongest management incentive among peers.

■ Multiple growth drivers in white goods categories. We expect AC sales to

rebound in 2H16 as destocking has largely completed. For refrigerator and

washing machine, we expect double-digit growth to continue, driven by its

market share gain thanks to its value for money positioning. Small appliance

sales will also accelerate driven by consumption upgrade and new product.

■ Positive on Toshiba and KUKA acquisitions. Toshiba acquisition should

help Midea to quickly enter the Japanese market and enhance its technology

through R&D sharing. We expect Toshiba to break even and start

contributing profit in 2018. KUKA transaction will be a stepping stone to

expand into the fast-growing robotics market and also enhance the group's

automation, which lead to long-term GPM improvement. If the KUKA deal is

approved, we expect it to contribute additional 4%/5% earnings in 2017/18.

■ Valuation appears attractive. Midea now trades at 10.2x P/E, a 10%

discount to the white goods industry. Excluding net cash, it is trading at 7.7x

2017E ex-cash P/E. With the best earnings outlook and ROE, we believe

Midea deserves to trade at industry premium. Our target price of Rmb34.50 is

based on 13x 2017E P/E, which is one standard deviation above industry

average. Risks to our valuation include (1) volatile raw material price, (2)

acquisition not going through, and (3) worse-than-expected industry growth.

Share price performance

The price relative chart measures performance against the

Shanghai Shenzhen CSI300 index which closed at

3,327.80 on 24/10/16. On 24/10/16 the spot exchange rate

was Rmb6.77/US$1

Performance 1M 3M 12M Absolute (%) 1.5 -3.2 45.0 Relative (%) -0.1 -5.0 51.8

Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 138,435.8 153,127.6 173,114.3 187,025.9 EBITDA (Rmb mn) 15,819.7 17,973.4 21,741.9 24,950.4 EBIT (Rmb mn) 12,967.7 14,604.6 17,933.4 20,835.8 Net profit (Rmb mn) 12,706.7 14,691.1 17,103.7 19,360.7 EPS (CS adj.) (Rmb) 2.99 2.29 2.66 3.01 Change from previous EPS (%) n.a. - - - Consensus EPS (Rmb) n.a. 2.25 2.57 2.92 EPS growth (%) 19.9 (23.4) 16.4 13.2 P/E (x) 8.9 11.7 10.0 8.8 Dividend yield (%) 4.5 3.5 4.0 4.6 EV/EBITDA (x) 10.3 8.8 6.5 5.0 P/B (x) 2.31 2.82 2.38 2.03 ROE (%) 28.7 26.7 25.8 24.8 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

26 October 2016


Midea Group Co Ltd (000333.SZ / 000333 CH)

Price (24 Oct 2016): Rmb26.66; Rating: OUTPERFORM; Target Price: Rmb34.50; Analyst: Raymond Ching

Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E

Sales revenue 138,436 153,128 173,114 187,026 Cost of goods sold 103,227 107,897 116,576 125,792 EBITDA 15,820 17,973 21,742 24,950 EBIT 12,968 14,605 17,933 20,836 Net interest expense/(inc.) (325) (725) (857) (1,258) Recurring PBT 16,051 18,612 21,642 24,493 Profit after tax 13,625 15,820 18,396 20,819 Reported net profit 12,707 14,691 17,104 19,361 Net profit (Credit Suisse) 12,707 14,691 17,104 19,361

Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E

Cash & cash equivalents 11,862 34,704 51,726 72,717 Current receivables 23,261 25,404 27,716 29,673 Inventories 10,449 11,909 10,974 10,972 Other current assets 47,796 55,538 55,898 56,148 Current assets 93,368 127,555 146,314 169,510 Property, plant & equip. 19,685 19,960 20,272 20,609 Investments 6,329 6,771 7,235 7,722 Intangibles 5,785 5,969 6,177 6,401 Other non-current assets 3,675 8,396 8,163 7,953 Total assets 128,842 168,652 188,160 212,195 Current liabilities 72,004 92,548 99,581 109,690 Total liabilities 72,810 99,944 106,977 117,086 Shareholders' equity 49,202 60,749 71,932 84,400 Minority interests 6,830 7,959 9,251 10,709 Total liabilities & equity 128,842 168,652 188,160 212,195

Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E

EBIT 12,968 14,605 17,933 20,836 Net interest 0 0 0 0 Tax paid (2,529) (2,827) (2,928) (3,375) Working capital 12,251 (116) 1,199 679 Other cash & non-cash items 3,559 (762) 8,187 7,384 Operating cash flow 26,248 10,900 24,390 25,524 Capex (3,131) (3,369) (3,809) (4,115) Free cash flow to the firm 23,117 7,531 20,582 21,410 Investing cash flow (17,989) (2,135) (2,067) (2,343) Equity raised 0 0 0 0 Dividends paid (4,908) (5,120) (5,921) (6,893) Financing cash flow (8,877) 14,077 (5,302) (2,190) Total cash flow (618) 22,842 17,022 20,991 Adjustments 17 0 0 0 Net change in cash (601) 22,842 17,022 20,991

Per share 12/15A 12/16E 12/17E 12/18E

Shares (wtd avg.) (mn) 4,255 6,425 6,425 6,425 EPS (Credit Suisse) (Rmb) 2.99 2.29 2.66 3.01 DPS (Rmb) 1.20 0.92 1.07 1.21 Operating CFPS (Rmb) 6.17 1.70 3.80 3.97

Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Sales revenue (2.2) 10.6 13.1 8.0 EBIT (1.7) 12.6 22.8 16.2 EPS 19.9 (23.4) 16.4 13.2 Margins (%) EBITDA 11.4 11.7 12.6 13.3 EBIT 9.4 9.5 10.4 11.1

Valuation (x) 12/15A 12/16E 12/17E 12/18E

P/E 8.9 11.7 10.0 8.8 P/B 2.31 2.82 2.38 2.03 Dividend yield (%) 4.5 3.5 4.0 4.6 EV/sales 1.2 1.0 0.8 0.7 EV/EBITDA 10.3 8.8 6.5 5.0 EV/EBIT 12.6 10.8 7.9 6.0

ROE analysis (%) 12/15A 12/16E 12/17E 12/18E

ROE 28.7 26.7 25.8 24.8 ROIC 23.3 24.0 28.6 35.3

Credit ratios 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) (13.9) (19.5) (36.7) (48.5) Net debt/EBITDA (x) (0.49) (0.75) (1.37) (1.85)

Company Background

A leading Chinese home appliances manufacturer covering various product categories. It also engages in property management, logistics and finance business. It is the major shareholder of Little Swan (000418.SZ) and Welling Holding (0382.Hk).

Blue/Grey Sky Scenario

Our Blue Sky Scenario (Rmb) 41.90

TP upside RMB41.9 – Our upside scenario assumes 2017 EPS to be 5% higher than our base case driven on better market sales and cheaper raw material. Our TP is based on + 2 standard deviation above industry average.

Our Grey Sky Scenario (Rmb) 26.50

TP downside: RMB26.5 – Our downside scenario assume 2017 EPS to be 5% lower than our base case given weaker sales sentiment and market competition. Our TP is based on industry average.


The price relative chart measures performance against the Shanghai

Shenzhen CSI300 index which closed at 3,327.80 on 24-Oct-2016

On 24-Oct-2016 the spot exchange rate was Rmb6.77/US$1


26 October 2016



Figure 97: Midea revenue breakdown(1H16)

Figure 98: Midea and Little Swan have gained

market share steadily

Source: Company data Source: CMM

Figure 99: Midea's export business is growing

rapidly

Figure 100: Toshiba will strengthen Midea's position

in Japan

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

Figure 101: KUKA's robotics and automation

solutions (System and Swisslog) will create multiple

synergies with Midea Figure 102: Midea P/E band chart


Air Conditioning44%

Refrigerators9%

Washing Machines

9%

Small Appliances26%

Motor3%

Logistics1%

Non-core business

8%

1314 14

1615

16 17

3 4 34 5 5 5

8 7

9 810 10

11

0

2

4

6

8

10

12

14

16

18

1H13 2H13 1H14 2H14 1H15 2H15 1H16

Little Swan Midea washer Midea refrigerator

%

38% 36% 38%44%

50%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 1H15 2015 1H16 2016E

Export Domestic

Japan70%

Others30%

Robotics30%

Systems49%

Swisslog21%

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

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p1

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y14

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Mean+2 std

Mean+1 std

Mean

Mean-1 std

Mean-2 std

Mean 8.2

Std 1.6

26 October 2016


Likely the fastest-growing white goods giant

Since Midea's relisting, the firm has been growing faster than its key competitors Qingdao

Haier and Gree, and we expect the trend to continue in the next few years. The group has

been gaining market share across all categories – AC, refrigerators, washing machines as

well as most categories in small appliances. Even during the AC destocking period, the

group's sales performance is still better than Gree given its diversified sales category.

In our view, the key drivers for market share gain are value for money positioning with a

strong brand name, and good product quality. It is priced at a discount to the market

leader in most categories, and this partly explains why its OPM is lower than industry

leaders in the respective segment but yet gradually improving.

Despite being one of the largest consumer appliance brands globally, Midea only ranks

second in air conditioner and washing machine and fourth in refrigerator. Its revenue in

these segments are 19%/8%/53% lower than the industry leaders, which implies more

room for growth driven by market consolidation and launch of innovative products.

We see multiple growth drivers for Midea's core business driven by both industry growth

and market share gain. We forecast revenue growth of 11%/13%/8% for

2016E/2017E/2018E.

Figure 103: Midea has the largest market share in global home appliance market

%

Midea 4.4

Philips 4.4

Panasonic 2.6

Haier 2.4

Conair 1.7

Black+Decker 1.7

Gree 1.6

LG 1.4

Joyoung 1.4

Oral-B 1.4

Source: Euromonitor

Figure 104: Midea has top market share in multi categories in China

Category 2015 market share Rank

Air-conditioner 25.2 2

Refrigerator 9.6 4

Washing machine 21.3 2

Rice cooker 42.3 1

Induction cooker 48.6 1

Pressure cooker 42.7 1

Electric kettle 32.2 1

Microwave oven 44.6 2

Water purifier 27.9 1

Kitchen stove 7.2 4

Range hood 8.8 4

Vacuum cleaner 11.3 3

Electric fan 12.2 3

Source: Company data

26 October 2016


Multiple growth drivers at white goods category

AC sales rebound as channel inventory improves

AC is the largest revenue contributor to Midea with a 44% revenue share. As inventory

situation normalises, we expect Midea's sales to rebound by 15%/26% from the low base

of -30% in 2H15 and -20% in 1H16. As discussed in the industry section, we expect

China's AC industry to witness a 5%sales CAGR, and we expect the firm to outperform

industry growth thanks to market share gain.

Based on our discussions with various companies, we estimate that industry AC inventory

has reduced to 26 mn units by the end of August, down 35% from the peak level and 15%

from the end of summer inventory in 2014. Based on IOL, which measures industry

manufacturing sales, AC sales for domestic market climbed 16%/23%/37% in

July/Aug/Sep from the low base of a 14% decline in the corresponding period last year.

Now Midea's inventory is at the lowest level since 2008 at around four to five months. The

company is actively rationalising its inventory level by controlling shipments and changing

from the traditional inventory-pile-up production mode to T+3 production mode which is

driven by retail demand. The changes should reduce the risk of inventory overhang in the

future.

Washing machine and refrigerator are gaining market share

Washing machine and refrigerator contribute 9% each to Midea's revenue. Midea is

aggressively taking market share in these two segments and is delivering above industry

revenue due to strong branding and good product quality.

Little Swan and Midea have gained 4% and 2% market share, respectively, and

refrigerator also gained 3% market share in 2013-1H16. We expect Midea's washer and

refrigerator to continue outperforming the market with 17% and 10% CAGR, respectively.

Small appliance benefits from fast market growth

Small appliances (include both kitchenware appliances and other life small appliances)

account for 26% of Midea's total revenue. We expect this segment to witness an 8%

CAGR, mainly driven by ASP growth. We expect consumption upgrade, such as traditional

rice cooker to IH rice cooker to drive up ASP 5%. As Midea enjoys a dominant position in

multiple small appliance categories, there is limited room for further market share

expansion.

Export sales driven by RMB depreciation and stronger branding

Thanks to RMB depreciation, Chinese home appliances export business achieved strong

growth in 8M16. As 70-80% of export sales are settled in USD, the strengthening USD

makes China home appliance export more competitive. There will also be temporary GPM

benefits from production costs reduction as production costs are mainly denominated in

RMB.

Midea has strong export business as its share of revenue has increased from 38% to 44%

from 2014 to 1H16, and is expected to reach 50% in 2016 year-end, partly boosted by the

consolidation of Toshiba.

Midea also targets to focus more on OBM instead of OEM, which is crucial for brand

establishment. At present, only about one-third of export business is OBM, compared to

Haier at 100%. We see plenty of room for Midea to further develop original brand business

overseas, and we expect export business to outgrow domestic business and reach 60%

revenue share in 2018 due to better product mix.

26 October 2016


Figure 105: Sales CAGR for different segments

Figure 106: Inventory has decreased more than

10mn units

Source：CMM, IOL, AVC, Credit Suisse estimates Source: IOL, AVC, Credit Suisse estimates

Figure 107: Midea has increased market share in

range hood/gas stove by 3%/2% from 2013

Figure 108: Midea has the largest rice cooker market

share

Source: CMM, Credit Suisse Source: CMM, Credit Suisse

Figure 109: Midea and Little Swan have been

gaining market share steadily

Figure 110: Midea's export business is growing

rapidly

Source: CMM Source: Company data, Credit Suisse

9.0%

6.0%

5.0%

4.3%

3.0% 3.0%

1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Kitctenware AC Life smallappliances

Bathroomelectricalappliance

Fridge Washer TV

30

40

26

-

5

10

15

20

25

30

35

40

45

2014 Jul 2015 Jul 2016 Jul

mn units

8%

10%

11% 11%

9%

10%

11% 11%

0%

2%

4%

6%

8%

10%

12%

14%

2013 2014 2015 6M16

range hood gas stove

Midea

41%

Joyoung

27%

Supor

14%

Others

18%

1314 14

1615

16 17

3 4 34 5 5 5

8 7

9 810 10

11

0

2

4

6

8

10

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14

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18

1H13 2H13 1H14 2H14 1H15 2H15 1H16

Little Swan Midea washer Midea refrigerator

%

38% 36% 38%44%

50%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 1H15 2015 1H16 2016E

Export Domestic

26 October 2016


Room for margin expansion

Midea expanded gross margin and net profit margin by 3% and 9% in 2011-2015,

respectively, due to better product mix, economies of scale and operational efficiency. We

expect these factors to continue driving up gross margin in 2016 and beyond and forecast

a 40 bp margin expansion in 2017/18. Compared to the market leaders (e.g., Gree in AC

and QD Haier in Washing Machine and refrigerator), Midea's margin in respective

products is still significantly behind, which suggests room for improvement. Among the

three categories, we see more margins upside for refrigerator and washer.

Better product mix

Midea has lower ASP than the lead player in all white goods segments due to its low end

position before 2011. Since repositioning, Midea has been focusing on profitability and set

high margin product share of sales as a KPI. As industry is trading up, consumers trend for

smart products/energy efficient products and other functional products, which should all

drive up gross margin. Midea still has ample room for margin improvements, as its

washing machine and refrigerator segments' margin still lag Haier for 5% and 8% in 1H16.

Operation efficiency/scale effect

At this stage, Midea lags 19%/53%/8% behind industry No.1 player in

AC/refrigerator/washer segments. As Midea's revenue size enlarges, we expect more

economies of scale to boost margin. Midea has invested over Rmb5 bn in automation

since 2012, which should also help for production optimisation and efficiency

enhancement. Looking forward, Midea will continue to spend around Rmb1-2 bn per

annum on automation with the help of KUKA. We expect higher efficiency and labour cost

reduction to further boost margin in the long term.

Figure 111: Midea 's revenue scale/gross margin still lag industry leaders

Category Brand Revenue (Rmb mn) Difference Gross margin

AC Midea 34,200 -19% 33%

Gree 41,982 40%

Refrigerator Midea 6,701 -53% 26%

Haier 14,280 34%

Washer Midea 7,381 -8% 29%

Haier 8,050 34%


26 October 2016


Toshiba – promising outlook

We are positive on Toshiba acquisition due to (1) R&D synergies on washing machines

and refrigerators, (2) channel leverage between the two companies (e.g., Midea to Japan

market and Toshiba to China), and (3) future profit contribution from Toshiba.

Toshiba is expected to have generated Rmb7,300 mn revenue (5% of group sales) and

US$500 mn loss in 2H16, but we expect a profit turnaround at 2017 due to (1) Midea's

successful integration track record, (2) long-term relationship with Toshiba, and (3) cost

savings on supply chain and sourcing integration (e.g., using Midea's production line to

manufacture Toshiba's products).

Transaction at a glance

In March this year, Midea acquired 80.1% of Toshiba's home appliance business for

US$693 mn (US$473 mn plus US$220 mn liabilities), which equals around Rmb4.5 bn.

The transaction was funded by a USD debt at 2.375% interest rate, meaning that Toshiba

needs to achieve at least US$16 mn to cover the interest costs. In addition to the asset,

Midea will get 40 years of Toshiba brand authorisation rights and over 5,000 patents.

In 2014, the acquired business had around Rmb23.7 bn revenue, including white goods

segment of Rmb13.7 bn and non-white goods segment of Rmb10 bn. White goods

segment include washer, vacuum cleaner, AC, refrigerator and kitchenware, and non-

white goods segment include sales and repairmen service for TV, PC and lighting, etc.

Toshiba's white goods unit has over 70% revenue from Japan and has a strong position

there, with a top-five market share position in multiple categories.

Toshiba's lifestyle segment (which contains Target Company in this transaction) has seen

revenue decline and increasing operating loss from 2013-2015 due to rising competition

and rising cost in OEM supplies on a weaker JPY. Target Company's balance sheet has

been incorporated into Midea's 1H16 financial statement, and its P&L will be consolidated

in 2H16. We have factored in US$500 mn loss from Toshiba in 2H16 but assume profit

breakeven in 2017 due to multiple synergies.

Figure 112: Toshiba has most revenue coming from

Japan

Figure 113: Refrigerator and washer are the most

important categories for Toshiba

Source: Company data Source: Company data

Japan70%

Others30%

Fridge26%

Washer23%AC

15%

Vacumn13%

Microwave10%

Other small appliances

13%

26 October 2016


Figure 114: Toshiba lifestyle revenue breakdown

Figure 115: Toshiba lifestyle net sales and operating

profit are decreasing


Multiple synergies with Toshiba

Market expansion. Before the acquisition, Midea had a small presence in

Japan, and Japan was mainly dominated by domestic brands. Toshiba has

strong branding locally with more than 3,600 Toshiba stores, and thus Midea

can quickly tap into the Japan and SE Asia markets and obtain local channels.

R&D synergies. This transaction includes more than 500 patents, which will

strengthen Midea's product competitiveness. Midea is relatively weak in the

refrigerator segment with a No.4 market share position, while Toshiba's

refrigerator segment is the largest among all. Toshiba's 's patent in DD motor,

inverter control patents as well as refrigerator insulation board will be crucial for

Midea's technological improvements

Visible profit turnover. Toshiba's profit turnover would be highly visible as (1)

Midea has scale advantage and upstream business, which can help Toshiba

reduce sourcing costs, (2) Midea has a strong track record of successful brand

acquisition, such as Little Swan, (3) Toshiba and Midea have long strong co-

operation history which reduce integration risks.

Figure 116: Midea and Toshiba have long collaboration history

1993 Midea and Toshiba co-operated in residential AC

1996 Midea and Toshiba co-operated in compressor

1998 GD Midea acquired 60% equity interest in Toshiba Macro, stepping into AC compressor industry.

2000 Midea and Toshiba formed strategic partnership

2002 Midea and Toshiba co-established a AC lab

2004 Established partnership with Toshiba Carrier in commercial AC and residential AC

2008 Midea and Toshiba Carrier established Anhui Meizhi Company for Refrigerator compressor business

Source: Company data, Credit Suisse research

PC61%

TV18%

White goods21%

-20,000

0

20,000

40,000

60,000

80,000

100,000

2013 2014 2015

Net sales Operating revenue

Rmb mn

26 October 2016


KUKA – way to a new market

We believe the major purpose of the KUKA acquisition is to tap into fast-growing robotics

industry in China. Midea has long aimed for engaging in this business, starting from its

joint venture with Yaskawa. This transaction may mark the start of a new chapter for

Midea.

China's robotics market has been witnessing a CAGR of 35% in 2010-15. Today, China

has the most number of industrial robots at 0.68 mn units, which make up for 27% of

global market share. However, due to low penetration rate, we see huge room for

industrial robotics business to grow. For every 10,000 workers, China has 36 robots while

Japan/Korea have 315/478, respectively. It is expected by the International Federation of

Robotics (IFR) that by 2020 industrial robots sales in China will reach 2.3 mn units,

implying a 28% CAGR.

At this stage foreign robots still dominate the Chinese market with around 70% market

share. By taking over KUKA, Midea can leverage its resources instead of starting from

zero, which would require significant investment in R&D and take multiple years to

achieve. On the other hand, Midea's strong channels and network can help KUKA

accelerate penetration in China.

We expect KUKA's financials to be consolidated in 2017, which will increase Midea's

revenue by around 14% and net profit by 4%, taking into consideration finance cost.

Figure 117: China has low penetration of industrial

robots

Figure 118: Chinese industrial robotics market will

continue to grow at a fast pace

Source: IFR Source: IFR, CRIA,askci.com

Transaction at a glance

Midea's tender offer to purchase 81% of KUKA's shares with €115/share, implies 36%

premium over its closing price and at 48x 2015 P/E. The transaction will be financed by an

overseas loan at 0.65% and internal cash. We expect KUKA's financials to be

consolidated in 2017 if the transaction goes through.

If the offer is successfully approved, Midea will hold 94.55% (with original 13.5% share) of

KUKA. KUKA will remain independent, meaning that its database would not be accessed

by Midea.

Tender offer is still pending approvals from European/Mexico anti-monopoly reviews,

CFIUS, and DDTC. These approvals would be completed before March 2017.

0

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2011 2012 2013 2014 2015 2020E

units (000)

26 October 2016


What does KUKA do?

KUKA is a leading robot manufacturer and automation solution provider. It is one of the

industrial robots "Big Four" families, together with ABB, Fanuc, and Kawasaki. KUKA's

business includes robotics, systems, and Swisslog. KUKA's robotics business includes

industrial and medical robotics, and industrial robots take about 9% of market share.

Around 50% of revenue comes from the auto industry. Systems segment provides

automation strategy for various clients. Swisslog was purchased by KUKA in 2014 and

specialises in automation solutions.

In 2015, KUKA's revenue was around €3 bn (Rmb21.7 bn) with €86.8 mn (Rmb0.5 bn) net

profit. The company generated 20% revenue CAGR and 30.6% earnings CAGR during

2011-2015. Net profit margin was low at 3% in 2015 due to strong pricing power of

customers. Industry net margin was below 5%. Among the three categories, robotics has

the highest gross margin with 39% gross margin, followed by systems (17.3%) and

Swisslog (15.7%).

Figure 119: KUKA revenue breakdown Figure 120: KUKA margin comparison

Source: Company data, Bloomberg Source: company data

Figure 121: Industrial robotics market share

Figure 122: KUKA has smallest revenue size among

the " Big Four"

Source: Company data, Bloomberg, Credit Suisse research Source: Bloomberg, Credit Suisse research

Synergies with Midea

Besides earnings accretion, KUKA's transaction would help Midea with market expansion

and efficiency enhancement. If the transaction gets approved, we expect it to take one to

two years for these synergies to kick in.

Robotics30%

Systems49%

Swisslog21%

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013 2014 2015

GPM OPM NPM

ABB11%

Fanuc17%

Yaskawa9%

Kuka9%

Others54%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Kuka Yaskawa Fanuc ABB

mn USD

26 October 2016


Possibly expand to service robotics industry. KUKA can possibly expand

into service robots industry, which is at an early stage and contains large

potential, in our view.

Further automation and efficiency enhancement for Midea. KUKA should

further improve Midea's production efficiency in addition to existing investments.

Midea has invested Rmb5 bn in automation with 1,200 units of industrial robots.

Its production staff number has decreased by 17% from 2013. KUKA's

experience in automation advisory (systems segment) and storage

management (Swisslog) can further enhance Midea's automation and product

efficiency which will boost GPM.

Figure 123: Midea cut staff number by 17% thanks

to automation

Figure 124: We expect KUKA to contribute 4%/5%

earnings to Midea in 2017E/2018E

Source: Company data Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

Note: Kuka earnings is based on Bloomberg consensus

95,506 94,779

78,731

0

20,000

40,000

60,000

80,000

100,000

120,000

2013 2014 2015

Rmb mn 2017E 2018E

Kuka estimated earnings 1,013 1,160

After tax finance cost (at 0.65% interest rate) -331 -138

Midea earnings 18,396 20,819

Contribution to Midea's earnings 4% 5%

26 O

cto

be

r 201

6

Ch

ina H

om

e A

pp

lian

ce

Sec

tor

55

Figure 125: Comparison between global industrial robot companies

Main business Main clients Sales in 2015 Net Profit in 2015 GPM OPM NPM Sales CAGR

16-18E

Kuka Offer customized automation solutions from

industrial robots to complete production lines.

Major segments include Swisslog (supplier of

automated intralogistics solutions)

Auto industry, hospitals,

warehouses and distribution

centers

€2,965.9mn € 86.8mn 23.5% 4.5% 2.9% 6%

Yaskawa The Yaskawa Electric Group consists of 77

subsidiaries and 25 affiliates with Yaskawa Electric

as the core company. Core business units include

1) motion control 2) robotics 3) system engineering

and 4) other such as IT related services and

logistics etc.

Semiconductor, LCD

manufacturing, steel plants, water

supply plants and home appliance

companies etc.

¥ 411.26 bn ¥ 22.365 bn 31.7% 8.9% 5.4% 1.7%

ABB ABABB is a global leader in power and automation

technologies. Its core business units include 1)

electrification products 2) discrete automation and

motion 3) Process automation and 4) power grids.

Oil and gas, power, chemicals

and pharmaceuticals, pulp and

paper, metals and minerals etc.

US$ 35,481 mn US$ 1,933 mn 28.6% 8.6% 5.4% 0.7%

FANUC FANUC manufactures factory automation systems

& equipment's, with three core business segments

consisting of 1) the FA Business Division, based on

its basic technologies of NC and SERVO,2) the

ROBOT Business Division and 3) ROBOMACHINE

Business Division which apply these basic

technologies

Machinery ¥ 623.418 bn ¥159.7 bn 47.6% 34.6% 25.6% -4.2%

Source: Company data, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates, sales forecasts are based on Bloomberg market consensus

26 October 2016


Strong employee incentives

In our view, Midea has the strongest management incentive plan among the three players.

At present, management holds 4% Midea shares. Together with three incentive options

scheme and two partnership plans for core management, management/employees would

have 10.2% Midea shares if all share scheme conditions are met.

Haier has a strong track record of management incentives with four past management

options scheme. Recently, Haier launched an employee share scheme which amounts to

0.6% total shares.

Gree has the weakest management incentive as it does not have much share schemes

except for the recent employee share plan after the Yinlong transaction. If the deal is

passed through, Gree management will have 2.7% of enlarged capital.

Figure 126: Midea has the strongest employee incentive pans among domestic three players

Midea Gree Haier

Existing shares 3.9% 0.80% 0.4%

Current Share scheme 4.9% 2.0%* 0.6%

past share scheme 1.4% 7%

Source: Company data, Credit Suisse estimates * as enlarged capital

Figure 127: Midea management incentive plan

Stock rewarding plan Partnership plan

plan1 plan2 plan3 plan1 plan2

Announcement date 2014/01 2015/03 2016/05 2015/04 2016/03

No. of benefited employees 562 639 929 15 15

No of shares (mn) granted 122.3 108.7 127.3 6.6 2.6

As % of 1H16 shares outstanding 2.4% 1.7% 2.0% 0.2% 0.04%

Exercise price 11.01 19.56 21.35 stock purchased at

34.85 on average

amounted RMB 230M

Stock purchased at

Rmb 30.69/share

Vesting/assigning period 2015,2016,2017 2016,2017,2018 2017,2018,2019 April 2018,2019,2020 April 2019

conditions phase1 *2015:2014 NP

growth>15%,

ROE>20%

*2016:2015 NP

growth>15%,

ROE>20%

2017: 2016 net profit>

avg last 3 yrs

2015 NP growth to

equity holders

>15%;ROE>20%

2016 weighted avg

ROE>20%

phase2 *2016:2015 NP

growth>15%,

ROE>20%

2017:2016 NP

growth>15%,

ROE>20%


avg last 3 yrs

TBA TBA

phase3 2017:2016 NP

growth>15%,

ROE>20%

2018:2017 NP

growth>15%,

ROE>20%


avg last 3 yrs

TBA TBA

* condition met


26 October 2016


Figure 128: Haier past incentives plan

plan1 plan2 plan3 plan4

Announcement Date 5/1/2009 9/1/2010 5/1/2012 4/12/2014

No. of benefited employees 49 68 200 3/29/1901

No of shares (mn) granted 35.0 22.0 26.0 54(47.6mn options and

6.9mn restricted shares)

As % of 1H16 shares outstanding 2.6% 1.6% 1.0% 1.8%

Exercise price (RMB) 5.24 10.11 10.36 Stock options: 16.63

Restrictive stock: 7.73

Vesting period 2010,2011,2012,2013 2012,2013,2014 2013,2014 2016,2017

conditions phase1 *2010:2009 core profit

growth>18% (actual 35%),

ROE>10% (actual 14%)

*2012:2011 core profit


ROE>10% (actual 25.6%)






ROE>20% (actual 27.58%)

phase2 *2011:2010 core profit









2016:2015 core profit

growth>15% (actual -

15.0%), ROE>20% (actual

16.2%)











Valuation

Midea is currently trading at 10.2x P/E, which is 1 standard deviation above its historical

average and 10% discount to the white goods industry. Excluding net cash, the stock is

only trading at 7.7 ex-cash P/E with a 3.5% dividend yield.

With the strongest earnings outlook among the three white goods companies, we believe

Midea deserves to trade at a premium. Our target price of Rmb34.50 is based on 13x

2017E P/E, which is one standard deviation above industry peers which we believe is

warranted by its stronger earnings outlook and above-industry ROE. At our target price,

Midea will be trading at 0.8x PEG, which appear fair, in our view.

Risks

Major risks to our target price and rating include the following:

Slower-than-expected macro environment Slower macro environment will have

negative impact on home appliance spending in general

Raw material price volatility unexpected raw material price hike will cause

margin erosion

worse-than expected property market slow property market growth will delay

refurbishment and reduce home appliance spending

KUKA acquisition not going through. Kuka acquisition not going through could

be a market surprise and have negative impact on Midea's automation progress.

26 October 2016


Shareholding structure

Figure 129: Shareholding structure

Source: Company data, Credit Suisse research Note: as of June 30,2016

Midea Group美的集团股份有限公司

(000333.SZ)

34.93%

Mr. He Xiangjian(Founder)

Ningbo Kailian Enterprise

宁波开联实业

Public

1.75%

Ningbo Meisheng宁波美晟

Midea Holdings美的控股

Zhuhai Ruirong

CDH鼎辉投资

Strategic investors94.55% 70%

1.14% 2.63% 4.56% 46.14%

30%

Mr. Fang Hongbo(CEO)

2.13%

26 October 2016



Gree Electric Appliances Inc of Zhuhai

(000651.SZ / 000651 CH) Rating OUTPERFORM Price (24 Oct 16, Rmb) 22.55 Target price (Rmb) 28.00 Upside/downside (%) 24.2 Mkt cap (Rmb/US$ mn) 135,655 / 20,028 Enterprise value (Rmb mn) 82,858 Number of shares (mn) 6,016 Free float (%) 72.8 52-wk price range (Rmb) 23.93-17.30 ADTO-6M (US$ mn) 284.6 *Stock ratings are relative to the relevant country benchmark.


Research Analysts

Raymond Ching

852 2101 7852

[email protected]

Carey Shi

852 2101 7729

[email protected]

Attractive valuation, sales recovery starting

from 2H16

■ We initiate coverage on Gree with an OUTPERFORM rating and a TP of

28, implying 24.2% potential upside. Gree is our top pick in the white

goods segment, given its cheap valuation, attractive yield and accelerating

earnings growth starting in 2H16 as the firm and industry largely completed

AC destocking. We forecast earnings to increase by 11.4% CAGR in 2016-

18. We have not factored in the Yinlong contribution as the deal is subject to

further approvals.

■ Core business benefits from industry recovery. We believe that industry-

wide AC channel inventory is back to normal and industry sell-in has turned

positive in 3Q16 versus the declining trend since July 2015. RMB

depreciation also supports its export business growth. We expect Gree's AC

sales to increase by 12% in 2H16 and witness 9% CAGR in 2016-18, up from

flat and -29% in 1H16 and 2015. We expect Gree to take market share in the

AC industry.

■ Mixed view on Yinlong deal. While Yinlong and NEV sector offers strong

long-term potential, this acquisition is expected to be EPS dilutive at least for

the next five years mainly due to the huge capex investment and a significant

24% share dilution to finance the deal. The share price discount to finance

the Yinlong deal (Equity fund raising price: Rmb15.57 vs Rmb22 today) seem

to be more favourable to Yinlong's shareholders, in our view.

■ Valuation and risks. Gree is trading at 8.6x 2017E P/E, a 20% discount to

the home appliance sector. Dividend yield is also attractive at 8%. Excluding

its net cash, its core business is trading at 5x P/E despite solid outlook. Our

target price of Rmb28 is based on 10.5x 2017E P/E, in line with the large cap

consumer appliance companies. Risks to our valuation include (1) weak

property cycle, (2) worse-than-expected industry growth, and (3) raw material

volatility.





was Rmb6.77/US$1

Performance 1M 3M 12M Absolute (%) 5.2 17.3 23.9 Relative (%) 3.6 15.5 30.7


Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 99,812.6 105,077.4 116,152.8 126,523.7 EBITDA (Rmb mn) 13,905.1 14,108.1 17,587.9 20,028.5 EBIT (Rmb mn) 12,587.4 12,941.7 16,298.6 18,624.1 Net profit (Rmb mn) 12,532.4 14,512.7 15,921.4 17,989.7 EPS (CS adj.) (Rmb) 2.08 2.41 2.65 2.99 Change from previous EPS (%) n.a. - - - Consensus EPS (Rmb) n.a. 2.36 2.59 2.89 EPS growth (%) (11.5) 15.8 9.7 13.0 P/E (x) 10.8 9.3 8.5 7.5 Dividend yield (%) 6.7 7.7 8.5 9.5 EV/EBITDA (x) 4.0 6.3 4.7 3.8 P/B (x) 2.85 2.56 2.32 2.09 ROE (%) 27.3 28.9 28.6 29.1 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash


26 October 2016


Gree Electric Appliances Inc of Zhuhai (000651.SZ / 000651 CH)



Sales revenue 99,813 105,077 116,153 126,524 Cost of goods sold 66,670 66,815 72,374 77,903 EBITDA 13,905 14,108 17,588 20,028 EBIT 12,587 12,942 16,299 18,624 Net interest expense/(inc.) (686) (956) (729) (863) Recurring PBT 14,909 17,261 18,937 21,397 Profit after tax 12,624 14,615 16,034 18,117 Reported net profit 12,532 14,513 15,921 17,990 Net profit (Credit Suisse) 12,532 14,513 15,921 17,990




EBIT 12,587 12,942 16,299 18,624 Net interest (1,163) (1,298) (1,052) (1,167) Tax paid (8,201) (3,072) (3,202) (3,594) Working capital 37,705 (19,699) (908) (1,063) Other cash & non-cash items 1,783 (10,087) 7,573 7,543 Operating cash flow 42,711 (21,215) 18,711 20,343 Capex (2,885) (2,732) (2,788) (2,784) Free cash flow to the firm 39,827 (23,947) 15,923 17,560 Investing cash flow (3,550) (2,637) (1,735) (1,616) Equity raised 0 0 0 0 Dividends paid (9,021) (9,024) (10,449) (11,463) Financing cash flow (7,179) (9,524) (10,949) (11,963) Total cash flow 31,982 (33,376) 6,026 6,764 Adjustments 1,876 0 0 0 Net change in cash 33,859 (33,376) 6,026 6,764

Per share 12/15A 12/16E 12/17E 12/18E

Shares (wtd avg.) (mn) 6,016 6,016 6,016 6,016 EPS (Credit Suisse) (Rmb) 2.08 2.41 2.65 2.99 DPS (Rmb) 1.50 1.74 1.91 2.15 Operating CFPS (Rmb) 7.10 (3.53) 3.11 3.38

Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Sales revenue (28.0) 5.3 10.5 8.9 EBIT (22.3) 2.8 25.9 14.3 EPS (11.5) 15.8 9.7 13.0 Margins (%) EBITDA 13.9 13.4 15.1 15.8 EBIT 12.6 12.3 14.0 14.7

Valuation (x) 12/15A 12/16E 12/17E 12/18E



ROE 27.3 28.9 28.6 29.1 ROIC (67.3) (93.1) 197.2 253.4



Company Background

Gree is one of the leading Chinese white appliance manufactures with GREE air-conditioner ranking No. 1 in terms of domestic market share in China. It also produces and distributes lifestyle appliances under the brand of TOSOT.



TP upside – RMB36 – Our upside scenario assumes 2017 EPS to be 5% higher than our base case driven by stronger AC market recovery and market share gain. Our TP is based on +1 standard deviation above industry average.


TP downside: RMB20.1 – Our downside scenario assumes 2017 EPS to be 5% below our base case given slower AC market recovery. Our TP is based on -1 standard deviation below industry average.






26 October 2016



Figure 130: Gree has No.1 AC market share

Figure 131: Inventory has decreased more than

10mn units

Source: Company data, Credit Suisse estimates Source: IOL, CMM, AVC, Credit Suisse estimates

Figure 132: Gree remains competitive at retail

market

Figure 133: Gree will tap into fast-growing NEV

industry

Source: CMM Source: Company data

Figure 134: Gree has increasing dividend payout

ratio and 8% dividend yield

Figure 135: Gree is trading at 20% discount to

industry average P/E

Source: Company data Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

Gree33%

Midea25%

Haier11%

Hisense6%Aux

4%

TCL2%Chigo

3%

Whirpool2%

Others14%

30

40

26

-

5

10

15

20

25

30

35

40

45

2014 Jul 2015 Jul 2016 Jul

mn units

31.0%

33.1%

27.6%

28.7%

24%

25%

26%

27%

28%

29%

30%

31%

32%

33%

34%

8M15 8M16

share of value share of volume

57%

38%

324%

343%

0%

50%

100%

150%

200%

250%

300%

350%

400%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2011 2012 2013 2014 2015

units

20%

29%

41% 42%

64%

72%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2010 2011 2012 2013 2014 2015

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jan

10

Ap

r10

Jul1

0

Oct1

0

Jan

11

Ap

r11

Jul1

1

Oct1

1

Jan

12

Ap

r12

Jul1

2

Oct1

2

Jan

13

Ap

r13

Jul1

3

Oct1

3

Jan

14

Ap

r14

Jul1

4

Oct1

4

Jan

15

Ap

r15

Jul1

5

Oct1

5

Jan

16

Ap

r16

Jul1

6

Oct1

6

Mean+2 std

Mean+1 std

Mean

Mean-1 std

Mean-2 std

Mean 6.7Std 1.45

26 October 2016


Core business benefits from industry recovery

With the company and industry AC channel inventory largely back to normal, we expect

Gree's AC sales (84% of group revenue) to increase by 12% in 2H16 and a 9% CAGR for

2016-18E, which is faster than our expected industry's 5% CAGR driven by market

consolidation as consumers trade up to better brands and functionality; solid export sales

growth is partly supported by RMB depreciation.

Figure 136: Gree revenue breakdown (1H16) Figure 137: Gree AC sales forecast

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

Industry destocking likely to complete soon

The AC channel inventory situation has improved much, thanks to the harsh summer in

2016, with AC retail sales up 16/23% YoY in July/Aug and continuous destocking effort of

leading companies since 2Q15. Based on our estimate, domestic channel inventory

stands at 26 mn, which is down 35% from industry's peak and also 10% lower than the

end of summer inventory in 2014.

Based on our industry checks, we believe that the current industry channel inventory

stands at four months, and it will take another one to two quarters to reach a reasonable

level. Therefore, it is general market expectation that industry inventory destocking should

be completed by the end of 2016.

Although destocking is likely to continue in 2H16, we expect Gree's AC sales to return to

12% growth given the low base of 40% decline in 2H15. We expect export sales to

increase by 15% while domestic sales to increase by 11%.

AC and parts84%

Small appliances

1%

Other products3%

Non-core business

12%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2012 2013 2014 2015 2016E 2017E 2018E

sales revenue (LHS) YoY (RHS)

26 October 2016


Figure 138: Inventory has decreased more than 10

mn units

Figure 139: Inventory situation improved after

destocking efforts since last year

Source: AVC, CMM, Credit Suisse estimates Source: CMM, IOL, Credit Suisse estimates

Although the destocking process is ongoing, we already see ASP picking up at the retail

end since March and +1% year to date till August. As the industry leader, Gree remains

competitive with 4% ASP growth for 9M 2016. Its market share also gained 2% and 1% in

terms of value and volume.

Figure 140: Industry ASP see slight improvements

Figure 141: Gree remains competitive at retail

market


Export business helped by RMB depreciation

We see positive growth for white good export segments YTD. We attribute the better

sentiment to RMB depreciation. As the white goods export is mainly settled in USD, thus a

higher USD rate against RMB would lower import costs, which makes China's white goods

OEM/ODM more attractive.

AC, refrigerator and washer shipments increased 10%/9%/4% for 8M16. Gree also has

25% revenue increase of export business in 1H16. We continue to see strong export

business in 2017 due to stronger brand image and a weak currency.

30

40

26

-

5

10

15

20

25

30

35

40

45

2014 Jul 2015 Jul 2016 Jul

mn units

-

100

200

300

400

500

600

700

800

900

1,000

Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16

Shipments Retail sales volume

10K units

Destocking

Stocking

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16

Rmb

31.3%33.4%

27.8%29.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

9M15 9M16

share of value share of volume

26 October 2016


Figure 142: White good segments performed well

YTD thanks to weak RMB

Figure 143: Gree has strong export business

growth

Source: IOL Source: Company data

Further forex gains in 2H16 are expected

Gree has a large foreign currency position with US$2.7 bn (Rmb17 bn) and ¥196 bn

(Rmb11 ¥bn) by the end of June 2016. In 1H16, Gree recorded Rmb2.3 bn forex thanks to

RMB depreciation. We see a possible forex gain in 2H16 as RMB continues to appreciate.

Based on our in-house forecasts, USD is expected to appreciate against RMB and JPY by

2%/5.3%, respectively. Assuming Gree's foreign cash position remains unchanged, we

forecast Rmb1 bn forex gains in 2H16.

Figure 144: Rmb has depreciated 7% against the USD since 2013


-4%

-7%

10%11%

3%

9%

3%

-9%

4%

-10%

-5%

0%

5%

10%

15%

2014 2015 8M16

Residential AC Refrigerator Washing machine

19% 24%

0%

20%

40%

60%

80%

100%

120%

1H15 1H16export domestic

5.60

5.80

6.00

6.20

6.40

6.60

6.80

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

26 October 2016


Figure 145: Gree is expected to have Rmb1 bn forex gains in 2H16

Currency Amount FX rate RMB equivalent Gain (Rmb)

2015 USD 2,659 6.49 17,267

JPY 195,737 0.05 10,550

1H16 USD 4,013 6.63 26,611 459

JPY 115,439 0.06 7,446 1,649

Sum 2,108

2H16 USD 4,013 6.79 27,248 637

JPY 115,439 0.07 7,838 392

Sum 1,030


Mixed view on Yinlong acquisition

We have a mixed view on the recent Yinlong acquisition. On the positive side, we see (1)

possible R&D synergies, (2) entrance to the promising new energy vehicle (NEV) market

and (3) private placement including employee shareholding scheme, which better aligns

the company and senior to middle management's interest, which in our view is important to

a SOE.

On the negative side, we see (1) uncertainties on the long-term application on the LTO

technology, (2) risks on government subsidies program and (3) the share price discount on

equity financing appears deep, which results in a 24% share dilution.

Based on the current pipeline, Yinlong will be consolidated to the group in early 2017. At

present, this transaction is still pending approvals from general shareholder meetings,

Ministry of Commerce, and CSRC. Assuming a full consolidation in 2017, we expect the

deal to be 15%/14%/13% EPS dilutive in 2017/18/19 based on the guaranteed earnings of

Rmb0.72 bn/Rmb1 bn/1.4 bn in 2017/18/19 against the 24% share dilution. As Gree is a

much larger company than Yinlong and the 24% share dilution is substantial, we estimate

that Yinlong needs to reach Rmb3.5 bn profit alone (2016E: Rmb720 mn) in 2017 in order

to become EPS accretive to Gree.

Background of Yinlong acquisition

In August 2016, Gree announced to acquire 100% stake of Zhuhai Yinlong for a total

consideration of Rmb13 bn. Yinlong is an integrated company from upstream battery

material and battery to downstream new energy vehicle (NEV) production. Its core

competency lies in LTO battery after acquiring 53.2% of a US public company Altairnano.

Yinlong is one of the top NEV companies in China with No.7 market share in electric

buses and 2,996 electric buses sales. Around 90% of its revenue comes from electric

business sales.

26 October 2016


Figure 146: Yinlong's core business

Source: Company filling, Credit Suisse research

Figure 147: Yinlong revenue breakdown

Figure 148: Yinlong ranks No.7 in 2015 China

electric buses market share


The transaction involves two stock financing plans. One is for Yinlong's shareholders

totaling Rmb13 bn to purchase. The second plan is private placements to eight

shareholders (including Gree and employee share scheme) for Yinlong's future

developments to raise Rmb9.69 bn. These two plans are estimated to dilute Gree's total

outstanding shares by 14% and 10%, respectively.

LTO battery

NEV

Battery charge service

LTO battery

LTO battery

LTO battery

LTO battery

Energy storage system

New energy vehicle

Battery charging service

Motor

LTO material

Electric buses89.4%

Bettery8.2%

Charging service1.0%

Energy storage0.4%

Materials1.1%

Yutong15%

Nanjing Kinglong10%

Zhongtong9%

Suzhou Kinglong8%

BYD6%Dongfeng Motor

6%

Yinlong4%

Golden Dragon3%

Others39%

26 October 2016


Figure 149: Transaction structure for Yinlong acquisition

Consideration

(Rmb bn)

Issue price Shares

no.

Shareholders no. Lock up Dilution Purpose

Stock financing for Yinlong 13 (28.5x/18.1x/13x

P/E for 15/16/17)

15.57 834,939,974 21 12-36 months 14% Yinlong acquisition

Private placements 9.69 15.57 622,632,934 8 36 months 10% Li-on battery production line

32K NEV production plan

Yinlong R&D center upgrade, etc.


Profit guarantee by Yinlong: Yinlong's management offers profit guarantee that

Yinlong's net profit should be no less than Rmb0.72 bn/1 bn/1.4 bn in 2016/17/18E, which

implies 18.1x 2016E P/E or 13x 2017E P/E for Rmb13 bn transaction consideration.

Yinlong's core management will remain after the acquisition. The profit guarantee is based

on Yinlong's original assets without considering the additional Rmb9.69 bn capex

investment.

Figure 150: Shareholdings structure before and after Yinlong transaction

Name Before transaction After transaction

Gree Group 18.2% 18.3%

Heibei Jinghai 8.9% 7.2%

Yintong investment group 0.0% 3.5%

Dong Mingzhu 0.7% 1.4%

Management incentive scheme (ex-chairlady) 0.0% 1.2%

Other management 0.1% 0.1%

Public 72.0% 68.3%


Pros and cons on this Yinlong acquisition

As highlighted in the previous section, we have a mixed view on the Yinlong acquisition.

While Yinlong and NEV sector offer strong long-term growth potential, this acquisition is

expected to be EPS dilutive at least for the next five years mainly due to huge capex

investment and a significant 24% share dilution to finance the deal. The share price

discount to finance the Yinlong deal (Equity fund raising price: Rmb15.57 vs Rmb22.2 at

present) seems to be more favourable to Yinlong 's shareholders, in our view.

Our positive view includes:

Possible synergies between Gree and Yinlong. We see synergies in R&D

and sales channel between these two companies. Both companies have

expertise in energy storage and new energy application. In addition, we believe

Yinlong can also leverage of Gree's strong relationship with the central

government to increase its sales to public transportation system and

government transportation usage.

Expansion into a fast-developing industry. Gree can diversify its business

from a single product company. This acquisition allows Gree to tap into the

promising NEV market. NEV unit sales jumped 300% growth in 2014/15 and it is

expected to sustain its strong growth momentum driven by government policy

supports and consumer preferences.

26 October 2016


Figure 151: NEV sales remains strong growth

Source: Gree filings

Better employee incentives. The private placement shareholders include an

employee incentive scheme with Rmb2.37 bn, which equals 2.5% of current

capital or 2% of enlarged capital. After this transaction, Gree's senior

management will hold 2.7% of total share.

In contrast, we are negative on the deal due to the following.

Inefficient usage of cash/shares dilution. With almost Rmb80 bn net cash in

2015, its internal cash is more than enough to finance the Yinlong acquisition at

Rmb13 bn. Therefore, we do not think that Gree needs to place new shares to

finance the deal which results in a significant share dilution. Management

explained that Yinlong's shareholders would prefer to receive Gree's shares

instead of cash.

Although the valuation of Yinlong acquisition does not appear expensive at 18x

2016E P/E and 13x 2017E P/E based on profit guarantee, it requires an

additional Rmb9.7 bn capex investment. In addition, the capex is also funded by

new shares instead of internal cash. Share issue price was Rmb15.57/share,

equivalent to a 12% discount to the last trading price 17.72 (ex Rmb1.5

dividend) when Gree suspended trading. During Gree's trading suspension, the

white goods sector re-rated with Midea and Qingdao Haier share price rallying

by 47%/29%, respectively. This makes the new share issue price appear

undervalued. Overall, this transaction resulted in a significant 24% share

dilution.

In our view, the firm should finance part of the deal by cash to avoid extensive

share dilution.

Limited application of LTO technology. Yinlong's core competency lies in

LTO technology. At present, the dominating battery technology for new energy

bus is LFP (lithium iron phosphate). Compared to LFP technology, LTO has

advantages of (1) high speed charging, (2) more charging no of times, (3)

adjustable to wide temperature range (-50º - 60 º). It also has some

disadvantages of (1) low energy density and (2) relatively high cost due to lack

of economies of scale.

Due to LTO battery's characteristics, it is mostly used in buses where the route

is fixed and busses can recharge more often. Technological improvements are

required before LTO technology can be expanded to other vehicles on a large

scale.

57%

38%

324%

343%

0%

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400%

0

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2011 2012 2013 2014 2015

units

26 October 2016


Policy risk. NEV business still largely relies on government subsidies. Current

policy subsidises NEV based on mileage after full charging; Yinlong may be put

into disadvantage as LTO battery can only take short distance per charge due

to low battery density.

Another risk is a downtrend in government subsidies. As the government

intends to decrease subsidies to address "subsidy cheating" issues (2017-2018

down 20% subsidies YoY), we see future risks of policy headwinds.

Valuation is cheap with large cash position

Gree trades at 8.6x 2017E P/E, a 20% discount to the industry P/E. Considering its 11.3%

EPS CAGR in 2016-18, we believe valuation appears attractive. With expected Rmb47 bn

cash by the end of 2016, which is 40% of its market cap, the ex-cash P/E valuation for its

core business is only 5x. We believe Gree is undervalued and deserves a multiple re-

rating, as we see a rebound in AC segment. Its 72% dividend payout and 8% dividend

yield will support a multiple re-rating, especially in the current low yield environment.

Target price at Rmb28

Our target price of Rmb28 is based on 10.5x 2017E P/E, largely in line with the white

goods industry multiple. At our target price, the stock will be trading at 7x ex-cash P/E,

which still appears inexpensive.

Figure 152: Gree has increasing dividend payout

ratio over the last 5 years Figure 153: White goods sector is trading at 11x P/E

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

20%

29%

41% 42%

64%

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26 October 2016


Figure 154: Gree is trading at 8.6x P/E, 20%

discount to white good segment Figure 155: Gree is trading at 5x ex-cash P/E

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

Risks


Slower-than-expected macro environment. Slower macro environment will

have negative impact on home appliance spending in general

Raw material price volatility. Unexpected raw material price hike will cause

margin erosion

Worse-than expected property market. Slow property market growth will delay


Yinlong acquisition not going through. Yinlong acquisition not going through

may be a market surprise and hinder Gree's business expansion.

0.0

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26 October 2016



Figure 156: Gree shareholding structure


Note: assuming the Yinlong transaction goes through

Gree Group

格力集团

Zhuhai SASAC珠海市国有资产委员会

100%

Gree Electric Appliances of Zhuhai

珠海格力电器股份有限公司(000651.SZ)

18.27%

Air-conditioner

Hebei Jinghai Guaranteed Investment

河北京海担保投资有限公司Public

Small appliancesCompressor,

motor and other components

Finance servicesGree-Daikin JV(Precision mold &

electric device)

7.17% 71.02%

(Alliance of 10 distributors)

3.54%

Management

51%

26 October 2016



Qingdao Haier Co., Ltd. (600690.SS / 600690 CH) Rating OUTPERFORM Price (24 Oct 16, Rmb) 10.29 Target price (Rmb) 12.30 Upside/downside (%) 19.5 Mkt cap (Rmb/US$ mn) 62,745 / 9,264 Enterprise value (Rmb mn) 66,017 Number of shares (mn) 6,098 Free float (%) 45.1 52-wk price range (Rmb) 10.94-7.48 ADTO-6M (US$ mn) 47.0 *Stock ratings are relative to the relevant country benchmark.


Research Analysts

Raymond Ching

852 2101 7852

[email protected]

Carey Shi

852 2101 7729

[email protected]

Global leader with solid earnings outlook

■ We initiate coverage on QD Haier with an OUTPERFORM rating and TP

of Rmb12.30. We like the company for its influential global branding, solid

15% 2016-18 earnings CAGR and undemanding valuation. In our view, QD

Haier is the strongest globally present brand among the white good

companies; the inclusion of GEA has significantly lifted its presence in North

America.

■ Organic sales growth improving in 2H16. We see sales accelerating

starting in 2H on AC sales recovery from low base, decent water heater sales

and better sales momentum for washing machine and refrigerator with market

shares gain at mid to low end segment supported by its initiative to broaden

low to mid-end SKUs. We expect 2H16/2017 organic sales growth to

accelerate to 9%/6% from -4% and -7.4% in 1H16/2015.

■ GEA is a major step up in global layout. We believe the GE home

appliance acquisition is a major step in enhancing global layout and multi

brandings. We see sourcing, R&D, channel expansion, and revenue

synergies in both near term and long term. With full consolidation, we

estimate that overseas would account for 45% of group revenue in 2017E

from 21% in 2015. We expect GEA to contribute ~30% revenue and ~25%

earnings in 2017/2018E.

■ Valuation appears undemanding. QD Haier trades at 10.7x 2017E P/E,

largely at par with the industry. We see stronger organic sales growth, GEA

inclusion as well as their synergies as share price catalysts. Our TP of

Rmb12.30 is based on one standard deviation above industry average, which

is justified by its stronger earnings outlook, margin and ROE. At our TP, the

stock will be trading at 0.8x PEG. Risks include raw material volatility, worse-

than-expected industry growth, low intense price competition, and slower-

than-expected integration of GEA.





was Rmb6.77/US$1

Performance 1M 3M 12M Absolute (%) -1.3 -0.6 3.7 Relative (%) -2.9 -2.4 10.5


Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 89,351.1 114,061.5 139,076.4 149,954.6 EBITDA (Rmb mn) 6,369.0 8,866.7 10,331.4 11,696.4 EBIT (Rmb mn) 5,042.1 8,011.3 9,288.3 10,571.7 Net profit (Rmb mn) 4,300.8 5,060.6 5,786.4 6,630.2 EPS (CS adj.) (Rmb) 0.70 0.83 0.95 1.09 Change from previous EPS (%) n.a. - - - Consensus EPS (Rmb) n.a. 0.83 0.97 1.09 EPS growth (%) (18.9) 17.7 14.3 14.6 P/E (x) 14.6 12.4 10.8 9.5 Dividend yield (%) 2.1 2.4 2.8 3.2 EV/EBITDA (x) 6.5 8.1 6.5 5.2 P/B (x) 2.78 2.37 2.04 1.76 ROE (%) 18.2 20.6 20.2 20.0 Net debt/equity (%) Net Cash 23.5 9.2 Net Cash


26 October 2016


Qingdao Haier Co., Ltd. (600690.SS / 600690 CH)



Sales revenue 89,351 114,062 139,076 149,955 Cost of goods sold 64,658 81,185 97,800 104,893 EBITDA 6,369 8,867 10,331 11,696 EBIT 5,042 8,011 9,288 10,572 Net interest expense/(inc.) (498) 695 1,096 1,071 Recurring PBT 6,975 8,454 9,710 10,907 Profit after tax 5,922 6,763 7,574 8,507 Reported net profit 4,301 5,061 5,786 6,630 Net profit (Credit Suisse) 4,301 5,061 5,786 6,630




EBIT 5,042 8,011 9,288 10,572 Net interest (525) (111) (115) (141) Tax paid (1,743) (1,734) (2,181) (2,447) Working capital (114) (1,573) (364) (134) Other cash & non-cash items 2,918 907 830 534 Operating cash flow 5,580 5,501 7,459 8,385 Capex (2,068) (1,815) (1,851) (1,685) Free cash flow to the firm 3,512 3,686 5,608 6,700 Investing cash flow (10,273) (34,466) (1,100) (960) Equity raised 342 0 0 0 Dividends paid (1,764) (1,293) (1,521) (1,739) Financing cash flow (1,896) 25,759 (1,521) (1,739) Total cash flow (6,589) (3,206) 4,837 5,686 Adjustments 152 32 32 32 Net change in cash (6,437) (3,174) 4,869 5,718

Per share 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Sales revenue (7.4) 27.7 21.9 7.8 EBIT (27.6) 58.9 15.9 13.8 EPS (18.9) 17.7 14.3 14.6 Margins (%) EBITDA 7.1 7.8 7.4 7.8 EBIT 5.6 7.0 6.7 7.0

Valuation (x) 12/15A 12/16E 12/17E 12/18E



ROE 18.2 20.6 20.2 20.0 ROIC 54.1 22.2 15.3 17.0


Net debt/equity (%) (65.9) 23.5 9.2 (3.2) Net debt/EBITDA (x) (3.35) 1.00 0.39 (0.14)

Company Background

QD Haier is a Chinese white appliance conglomerate with leading market share in refrigerators, air cons, washing machines and water heaters. It is the major shareholder of Haier Electronics (1169.HK).



TP upside – RMB14.9 – Our upside scenario assumes 2017 EPS to be 5% higher than our base case driven by stronger than expected synergy with GEA. Our TP is based on +2 standard deviation above industry average.


TP downside: RMB9.5 – Our downside scenario assumes 2017 EPS to be 5% lower than our base case due to softer washing machine and refrigerator sales and weaker GEA performance. Our TP is based on industry average.






26 October 2016


Focus chart and tables

Figure 157: QD Haier revenue breakdown

Figure 158: AC channel inventory has significantly

improved

Source: company data(1H16) note: GEA is included since June Source: IOL, AVC, CMM, Credit Suisse estimate

Figure 159: After inclusion of GEA, QD Haier will

become a global leader with comprehensive

coverage Figure 160: GE revenue breakdown (9M15)

Source: company data, Credit Suisse research, outline.map.com Source: Company data

Figure 161: QD Haier's margin has been increasing

due to better product mix

Figure 162: Company is trading close to historical

average

Source: Company data Source: Bloomberg, Credit Suisse estimates

Air conditioner19%

Refrigerators29%

Kitchenw are (including w ater

heater)

7%

Washing machines

17%

Equipment Product

3%

ICS17%

Non-core business

1%

GEA7%

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2014 Jul 2015 Jul 2016 Jul

mn units

Kitchenware34%

Fridge29%

Washer19%

Dishwasher10%

Others8%

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2011 2012 2013 2014 2015 1H16

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26 October 2016


Global leader with solid earnings outlook

We see solid earnings backed by organic growth and GEA acquisition. We expect the firm

to deliver 15% earnings growth in 2016-18E. For its existing business, we see sales

acceleration starting in 2H on AC sales recovery from low base, decent water heater sales

and better sales momentum for washing machine and refrigerator, with market shares gain

at mid to low end segments supported by its initiative to broaden low to mid-end SKUs to

service price-sensitive customers.

In the overseas market, QD Haier is the most influential brand among the three white

goods giants, with 100% OBM and top three market share in AC/washer/refrigerator in the

world. GEA inclusion will further strengthen the company's global positioning and product

offerings, as this transaction will provide multiple synergies including R&D, sourcing and

sales channel. We expect GEA to contribute ~30% revenue and ~25% earnings in

2017/2018E.

Figure 163: QD Haier has leading market share in white good sector in in the world

2014 2015

market share rank market share rank

washer 18.50% 1 18.9% 1

AC 8.90% 3 8.6% 3

refrigerator 11.20% 2 11.9% 2

Source: Euromonitor

Organic sales growth is improving starting 2H

We believe the industry recovery in AC, extending product coverage to low to mid end

segment for washing machines and refrigerators, as well as its leading position in smart

products would lead to a 6% sales CAGR for existing business, faster than the overall

market growth of 3-4%.

AC sales to rebound in 2H16/1H17 on low base effect

We believe QH Haier's AC segment should see a recovery in 2H16 and 1H17 against the

easy base (2H15: -29%, 1H17: -8%), and the industry destocking cycle is close to

completion.

Based on IOL data, Haier's overall shipment (including domestic and export) in July/Aug

was up 42%/26%, which is faster than industry shipment growth of 16%/27%. We expect

its AC sales (excluding GEA) to increase by 21%/10% in 2H16/2017, and a high single

digit growth on a normalised basis in 2018

In our view, QD Haier has the best inventory management system among the three

domestic brands as its sales channels are managed by its subsidiary Haier Electronic.

Its current AC inventory remains low at 900k units or just around 13% of its full-year sales

volume. In our view, the low inventory level should pave way for QD Haier's ASP increase

and free up distributors' resources to develop other electronic categories. We see GPM

upside for its AC segment as its GPM is only at ~30% versus at 33% and Gree at 40%.

26 October 2016


Figure 164: AC channel inventory has significantly

improved

Figure 165: Domestic AC sales picked up in

July/August/Sep this year

Source: AVC, CMM, Company data, Credit Suisse estimates Source: IOL, Credit Suisse estimates

Extending mass market SKUs at washing machine/refrigerator to drive growth

QD Haier is positioned at the mid to high end in AC/refrigerator/washing machine

segments, with 5%/15%/3% price premium, respectively. The brand has strong position in

the high-end market but this also affects its retail sales as the market's competition

intensifies. Its competitors such as Little Swan and Midea are aggressively taking share in

mid to low end market using a value for money positioning.

In order to penetrate into the mass market, QD Haier started to allocate more resources

since end of 2015 by expanding products below Rmb2,000 to serve consumers that are

more price sensitive. These new products still make a good GPM. Based on our channel

checks, we see washing machine and refrigerator sales growth to pick up in 2H16 with

refrigerator returning to positive growth (1H16: -5%) and washing machine growth

accelerating.

We expect the group to outperform industry growth driven by its leverage on its multi

brand strategy (Casarte at high end, Haier at mid to high end, Leader for young

customers) and the addition of value for money products. We expect its refrigerator and

washing machine sales to grow by mid-single digit, slightly faster than industry growth at

low single digit.

Figure 166: Qingdao Haier targets the mid-to-high end market

Industry QD Haier premium

AC 3,430 3,600 5.00%

Washer 2,429 2,494 2.70%

Refrigerator 3,146 3,609 14.70%


Leader in smart appliances

QD Haier is a pioneer in smart appliances with seven smart factories (800 production line)

and broad smart product categories. It was the first domestic company to launch an

integrated smart platform U+ in 2014, and it was selected as the only home appliance

company to help set national standards for smart production.

Smart appliances contribute around 15% revenue to Haier's total revenue. We expect this

number to reach 30% in the next three years, as consumers are trading up for more

advanced products. Also, smart products have 15-25% price premium over non-smart

ones.

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26 October 2016


Figure 167: Retail price for smart and non-smart products

Product Smart price Non-smart price Premium for smart

function

AC Inverter /3rd grade

efficiency

3,466 2,932 18.2%

Refrigerator Two door/530L/non-

inverter

3,499 3,099 12.9%

Washing machine 7KG/drum type/non-

inverter

1898 1498 26.7%


Expansion to imbedded kitchenware products via GEA

Kitchenware accounted for 7% of sales with water heater contributing 70% of this

segment. As discussed in the industry session, imbedded large kitchen appliance has

huge potential, but the group has limited presence in this space at present.

GEA is strong on kitchenware with this segment contributing around 25% sales. Starting in

2017, the group will leverage on its China channel platform to introduce GE brand into the

imbedded kitchenware market. GE brand will mainly target the mid - high end customers.

We believe it is too early to provide an estimate on the additional revenue contribution

from GE in kitchenware but it is fair to expect this segment to be the fastest growing

category in the group, as existing water heater sales outlook is already faster than other

categories given relatively low penetration rate.

26 October 2016


GEA acquisition – a major step in global layout

In our view, the inclusion of GE will significantly expand Haier's market share in United

States and its global presence. With full year consolidation of GEA, we estimate that

overseas sales will contribute 45% of group's revenue in 2017E, up from 21% in 2015.

QD Haier has 3% volume share of major appliances in the US, while GE ranks No.2 in US

market with 17% volume share. The transaction would instantly give Haier substantial

presence in kitchenware, washer, and dishwasher in the US. QD Haier already has

multiple brands to target various countries globally (see Figure 165 below; GEA will

become an extended piece for its complete global mapping).

We see multiple near-term synergies in R&D, sourcing, and network expansion. On top of

organic growth for each individual business, management targets to achieve Rmb10 bn

revenue synergy (8% of 2016 revenue) in five years between the two brands via

leveraging each other's local channels to cross sell (e.g., selling Haier brand to the US and

GE brand to China). Management indicated that majority of the revenue synergy will come

from GE. GEA's financial statements were consolidated in June 2016. We expect it to

contribute 20%/30%/32% revenue in 2016/2017/2018E.

Figure 168: GE inclusion significantly expands the group's US market shares

Source: Company data, outline-world-map.com

Figure 169: GE is the 2nd

largest electronic brand in United States (volume wise)

Brand 2013 2014 2015 Rank

Whirlpool 26.3% 26.5% 26.3% 1

GE 16.8% 16.6% 16.7% 2

Sears 12.9% 12.1% 11.8% 3

Electrolux 8.0% 7.9% 8.0% 4

LG 6.3% 6.8% 7.0% 5

Samsung 6.4% 6.4% 6.6% 6

Broan-Nutone 3.7% 3.5% 3.4% 7

Sharp 3.0% 2.9% 2.9% 8

Haier 2.9% 3.0% 2.9% 9

Panasonic 2.0% 2.0% 2.0% 10

Source: Euromonitor

26 October 2016


Financials – expect to contribute 25% earnings in 2017/18

QD Haier acquired GE home appliance business for US$55.8 bn with 40 years of

trademark usage. Transaction implies a 10.1x EV/EBITDA and 2.7x P/B. If we consider

US$1 bn tax shield amortised over 15 years, the multiples would become 8x EV/EBITDA

and 2.2x P/B. The transaction was financed by a five-year US$33 bn loan from Chinese

Development Bank at 3% interest rate, and the rest from internal cash. Based on our

estimate, GEA acquisition is earnings accretive after considering the additional interest

expenses. There is a one-off Rmb400-500 mn acquisition transaction fee booking into

2H16. We estimate GE will contribute ~25% earnings to the group in 2017/18.

GEA Business background

GE Appliances is a leading home appliance brand in the US with 90% revenue generated

from the US and 20% market share. Its main products include kitchenware and white

goods, and most products have a top three market share in the US.

The US home appliance market is a relatively mature market with a high penetration rate.

Consumption demand comes more from replacement and upgrade needs than new

purchase. Euromonitor forecasts a 3.4% market size CAGR in 2016E-20E.

Figure 170: GEA has top ranking in multiple categories in US

2014 Rank 2015 Rank

AC 12% 1 13% 1

Refrigerator 18% 2 18% 2

Washing machine 10% 4 10% 4

Large kitchenware 24% 1 24% 1

Dish washer 15% 2 16% 2

Microwave 22% 1 22% 1

Total home appliance 20% # 2

Source: Euromonitor

Figure 171: GEA mainly focuses on US market Figure 172: GEA Revenue breakdown


US90%

Others10%

Kitchenware34%

Fridge29%

Washer19%

Dishwasher10%

Others8%

26 October 2016


Figure 173: US home appliance market is mature

with a high penetration rate

Figure 174: US home appliance to see a 3.4%

CAGR from 2016E-20E

Source: Euromonitor Source: Euromonitors

Synergies between the two companies

Besides revenue/earnings contribution from GEA, we also see multiple near-term and

long-term synergies of GEA acquisition in the following aspects.

R&D/sourcing synergies GEA has four global research centers and over 1,000 patents.

Its technology in kitchenware (e.g., fast baking) and washing machines will strengthen

Haier's R&D capability. The two companies also share 40% product components, thus we

expect cost saving in raw material purchase. Management aims to achieve a total of Rmb1

bn sourcing cost savings via sourcing consolidation for three years, which is equivalent to

around 1.5% of its COGS in 2016E. The synergy will drive a slight GPM expansion going

forward.

Channel synergies GEA can leverage on QD Haier's strong sales network in China to

expand into China market. QD Haier has plans to introduce GEA as a high-end

kitchenware brand in 2017. On the flipside, GE has strong logistic resources in the US with

40% from contracts with property companies. QD Haier can also strengthen its presence

in US. Overall, management targets to achieve Rmb10 bn revenue synergy in five years.

Product complements GE has strong position in kitchenware, which can complete QD

Haier's product offerings.

Valuation

QD Haier trades at 10.7x 2017E P/E, largely at par with the industry and around its five-

year average trading multiple. Price catalysts would include stronger organic sales growth,

GEA inclusion as well as their synergies.

Our target price of Rmb12.30 is based on one standard deviation above industry average,

which is justified by its stronger earnings outlook, margin and ROE. At our TP, the stock

would be trading at 0.8x PEG, which suggest our valuation is not aggressive.

0

50

100

150

200

250

300

350

400

Smallappliance

Fridge Washer AC Microwave Dishwasher

USA China

%

0

10

20

30

40

50

60

70

80

2011

2012

2013

2014

2015

2016E

2017E

2018E

2019E

2020E

US$ bn

3.4% CAGR

4.7% CAGR

26 October 2016


Risks


Slower-than-expected macro environment. Slower macro environment will

have negative impact on home appliance spending in general.

Raw material price volatility. Unexpected raw material price hike will cause

margin erosion.

worse-than expected property market. Slow property market growth will delay

refurbishment and reduce home appliance spending.

slower-than-expected integration of GEA. Slower-than-expected integration of

GEA could have negative impact on future revenue and profit.


Figure 175: QD Haier shareholding structure


Air conditioner business

51.2%

Haier Group海尔集团

Small appliancebusiness

Equipmentbusiness

Haier Electronics海尔电器集团有限公司

(1169.HK)

43.84%

Qingdao Haier

青岛海尔股份有限公司(600690.SS)

Others & public

49.3%

Refrigeratorbusiness

Washing machine business

Water heater business

Integrated channel services

Haier VC Consultant

Haier Electronics International

2.6% 20.6%17.6%

100% 100%

Acting in concert

KKR Home Investment

9.9%

Collectively owned

Qingdao State-Owned Assets Administration office

26 October 2016



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

1169 HK) Rating NEUTRAL Price (24 Oct 16, HK$) 12.72 Target price (HK$) 13.40 Upside/downside (%) 5.3 Mkt cap (HK$/US$ mn) 35,528 / 4,580 Enterprise value (Rmb mn) 20,907 Number of shares (mn) 2,793 Free float (%) 43.8 52-wk price range (HK$) 15.74-11.00 ADTO-6M (US$ mn) 5.3 *Stock ratings are relative to the relevant country benchmark.


Research Analysts

Raymond Ching

852 2101 7852

[email protected]

Carey Shi

852 2101 7729

[email protected]

Expect moderate growth but valuation

unattractive

■ We initiate coverage of Haier Electronic with a NEUTRAL rating and a

TP of HK$13.40. While we expect ICS revenue will likely to return positive in

2H on better retail sales, 2017 earnings are expected to see moderate growth

of ~10%, which is slower than other white goods companies. At 11x 2017E

P/E (1xPEG) and 2% yield, valuations do not appear attractive, in our view.

■ ICS revenue likely to turn positive in 2H. We expect ICS revenue to return

to growth in 2H16 (vs. -7% in 2015 and -9% in 1H16) driven by better retail

sales of Haier products and stronger logistics demand on more e-commerce

promotion events. In 2017, we expect ICS revenue to grow 7% on mid-single-

digit channel sales growth (offline+e-commerce) and ~10% logistic revenue

growth. We expect slight margin improvement from the logistics business

■ Moderate growth for washing machines and water heaters. We expect

washing machine and water heater sales to rise by mid- to high-single digits,

respectively, largely in line with 1H16. As these two categories are already in

a mature phase, we expect white good manufacturing to achieve mid- to

high-single digit growth going forward, slightly faster than the industry’s.

■ Valuation not attractive enough. Haier Electronics is trading at 11x 2017E

P/E, slightly higher than white goods sector. As the ICS segment is only

expected to achieve mid- to single-digit growth in 2017 and the logistics

contribution to operating profit is too small at 7-8%, we believe it is hard to

justify a large premium over white good sector. Our TP of HK$13.40 is

referenced to segment average 11xP/E. Risks include raw material volatility,

worse-than–expected industry growth, increased price competition.



MSCI CHINA F IDX which closed at 6,532.39 on 24/10/16.

On 24/10/16 the spot exchange rate was HK$7.76/US$1

Performance 1M 3M 12M Absolute (%) -2.8 -0.5 -19.1 Relative (%) -1.3 -10.4 -19.2


Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 62,826.1 61,672.1 65,400.1 69,236.0 EBITDA (Rmb mn) 3,398.8 3,370.8 3,732.7 4,126.3 EBIT (Rmb mn) 3,139.5 3,129.9 3,477.3 3,855.9 Net profit (Rmb mn) 2,703.0 2,630.1 2,902.4 3,199.2 EPS (CS adj.) (Rmb) 0.97 0.93 1.03 1.13 Change from previous EPS (%) n.a. - - - Consensus EPS (Rmb) n.a. 0.98 1.07 1.18 EPS growth (%) 8.2 (3.8) 10.2 10.1 P/E (x) 11.4 11.9 10.8 9.8 Dividend yield (%) 0.9 0.9 1.0 1.1 EV/EBITDA (x) 6.5 6.1 5.2 4.3 P/B (x) 2.07 1.80 1.56 1.37 ROE (%) 20.7 16.5 15.7 15.1 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash


26 October 2016


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

Price (24 Oct 2016): HK$12.72; Rating: NEUTRAL; Target Price: HK$13.40; Analyst: Raymond Ching


Sales revenue 62,826 61,672 65,400 69,236 Cost of goods sold 52,833 51,366 54,455 57,636 EBITDA 3,399 3,371 3,733 4,126 EBIT 3,140 3,130 3,477 3,856 Net interest expense/(inc.) (193) (225) (225) (225) Recurring PBT 3,344 3,355 3,702 4,081 Profit after tax 2,734 2,684 2,962 3,265 Reported net profit 2,703 2,630 2,902 3,199 Net profit (Credit Suisse) 2,703 2,630 2,902 3,199


Cash & cash equivalents 10,244 11,552 12,930 14,523 Current receivables 4,971 5,167 5,405 5,787 Inventories 4,399 4,044 4,311 4,690 Other current assets 3,673 3,530 3,597 3,795 Current assets 23,288 24,293 26,242 28,795 Property, plant & equip. 3,322 4,203 5,136 6,124 Investments 1,611 1,611 1,611 1,611 Intangibles 531 527 523 518 Other non-current assets 1,545 1,665 1,792 1,926 Total assets 30,297 32,299 35,304 38,974 Current liabilities 13,002 12,588 12,924 13,654 Total liabilities 14,575 14,165 14,510 15,248 Shareholders' equity 14,788 17,146 19,747 22,614 Minority interests 879 933 992 1,057 Total liabilities & equity 30,297 32,299 35,304 38,974


EBIT 3,140 3,130 3,477 3,856 Net interest 0 0 0 0 Tax paid (582) (741) (817) (901) Working capital (295) (128) (249) (244) Other cash & non-cash items 267 545 536 552 Operating cash flow 2,530 2,807 2,947 3,263 Capex (1,306) (1,167) (1,234) (1,303) Free cash flow to the firm 1,224 1,639 1,713 1,959 Investing cash flow (2,373) (1,162) (1,229) (1,298) Equity raised 1 1 0 0 Dividends paid (253) (273) (302) (332) Financing cash flow (402) (337) (340) (371) Total cash flow (245) 1,308 1,377 1,593 Adjustments 26 0 0 0 Net change in cash (219) 1,308 1,377 1,593

Per share 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Sales revenue (6.4) (1.8) 6.0 5.9 EBIT 4.4 (0.3) 11.1 10.9 EPS 8.2 (3.8) 10.2 10.1 Margins (%) EBITDA 5.4 5.5 5.7 6.0 EBIT 5.0 5.1 5.3 5.6

Valuation (x) 12/15A 12/16E 12/17E 12/18E



ROE 20.7 16.5 15.7 15.1 ROIC 53.0 34.6 33.0 31.7



Company Background

Haier Electronics Group is a home appliances manufacturer covering washing machines, water heaters, and integrated channel services. It is a subsidiary of Qingdao Haier (600690.SS)


Our Blue Sky Scenario (HK$) 17.50

TP upside – RMB17.5 – Our upside scenario assumes 2017 EPS to be 5% higher than our base case driven by stronger ICS performance and margin expansion. Our TP is based on +1 standard deviation above its historical 5 year average.

Our Grey Sky Scenario (HK$) 10.00

TP downside – RMB10 – Our downside scenario assumes 2017 EPS to be 5% lower than our base case on worse than expected ICS performance and weaker white good manufacturing sales. Our TP is based on -1 standard deviation below its historical 5 year average.


The price relative chart measures performance against the MSCI CHINA F IDX

which closed at 6,532.39 on 24-Oct-2016

On 24-Oct-2016 the spot exchange rate was HK$7.76/US$1


26 October 2016


Focus chart and tables

Figure 176: ICS contributes 72% for Haier

Electronics' revenue

Figure 177: We expect ICS revenue to grow 7% in 2017

on better channel sales growth and logistics growth

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

Figure 178: We estimate moderate growth for water

heaters and washing machines

Figure 179: Haier Electronics has the No.2 market

share in water heaters (value)

Source: Company data, Credit Suisse estimates Source: CMM

Figure 180: We see slight margin improvements due

to better ICS business

Figure 181: The company is trading at par with the

white goods sector

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

Washing machines

22%

Water heaters6%

ICS72%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0

20,000

40,000

60,000

80,000

2011 2012 2013 2014 2015E 2016E 2017E 2018E

ICS revenue YoY

(Rmbmn)

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-8%

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6%

8%

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2013 2014 2015E 2016E 2017E 2018E

Washing machines Water heater revenue WM YoY WH YoY

RMB mnHaier15%

Midea13%

AO Smith26%Vanward

7%

Macro7%

Whirpool2%

Vatti3%

Rinnai7%

Noritz4%

Others16%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2013 2014 2015E 2016E 2017E 2018E

GPM OPM NPM

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

Jan11

Apr11

Jul11

Oct11

Jan12

Apr12

Jul12

Oct12

Jan13

Apr13

Jul13

Oct13

Jan14

Apr14

Jul14

Oct14

Jan15

Apr15

Jul15

Oct15

Jan16

Apr16

Jul16

Oct16

Mean+2 std

Mean+1 std

Mean

Mean-1 std

Mean-2 std

Mean 13.4Std 3.6

26 October 2016


Valuation

Our TP of HK$13.40 is referenced to its five-year historical trading average 13xP/E.

Haier Electronics is trading at 12x 2017E P/E, slightly higher than white goods sector. As

the ICS segment is only expected to achieve mid- to single-digit growth in 2017 and the

logistics contribution to operating profit is too small at 7-8%, we believe it is hard to justify

a large premium over white good sector.

Risks


Slower-than-expected macro environment Slower macro environment will have

negative impact on home appliance spending in general

Raw material price volatility unexpected raw material price hike will cause

margin erosion

worse-than expected property market slow property market growth will delay





Haier Group

JP Morgan

Integrated Channel Services Business

Washing Machine Business

5%43.8%

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

40.8%

51%

Water Heater Business

Distribution LogisticsAfter-sales

serviceE-commerce

Other public shareholders

Qingdao Haier (600690.SH)

26 October 2016



Hangzhou Robam Appliances Co Ltd

(002508.SZ / 002508 CH) Rating OUTPERFORM Price (24 Oct 16, Rmb) 38.93 Target price (Rmb) 50.30 Upside/downside (%) 29.2 Mkt cap (Rmb/US$ mn) 28,421 / 4,196 Enterprise value (Rmb mn) 25,855 Number of shares (mn) 730.06 Free float (%) 97.2 52-wk price range (Rmb) 41.27-25.00 ADTO-6M (US$ mn) 26.4 *Stock ratings are relative to the relevant country benchmark.


Research Analysts

Carey Shi

852 2101 7729

[email protected]

Raymond Ching

852 2101 7852

[email protected]

Market share taker in a fast growing industry

■ We initiate coverage on Hangzhou Robam with an OUTPERFORM rating

and TP of Rmb 50.30. Robam is our top pick in the kitchenware sector. We

like the company for its strong CAGR outlook of 28% for 2016-18E and

undemanding valuation. We believe that both its strong sales growth and

high margin are sustainable in the coming few years.

■ Market share taker in a fast-growing segment. Robam reported a 32%

CAGR from 2011-15. Despite this high base, we believe a 21% revenue

CAGR is achievable on: (1) ~9% market growth; (2) share gains as

consumers trade up; (3) channel expansion in high/low tier cities; and (4)

rising contribution from new categories. Robam only has 10%/7% volume

shares in range hoods and gas stoves, substantially lower than the 30-40%

shares for white goods leaders. We see ample potential for share gains.

■ Sustainable margin on strong branding and trade up. Robam's industry

high margin is attributed to its premium pricing and scale effect. We expect

the high margin to sustain, backed by: (1) obvious market trades-up for better

quality and stylishness; (2) its top industry branding; and (3) the highest

investment in marketing and branding. We see mild margin expansion on

rising e-commerce contribution and operating leverage.

■ Valuation and risks. Robam trades at 19x 2017E P/E, on par with the

industry. With its dominant market shares, best industry operating matrix and

robust earnings outlook, we see room for a multiple re-rating. Our TP of

Rmb50.30 is based on 24x 2017E P/E, one standard deviation above the

kitchenware sector, which is justified by its best-of-breed performance.

Risks: Weak property cycle, macro weakness and intensifying market

competition.





was Rmb6.77/US$1

Performance 1M 3M 12M Absolute (%) -0.2 -2.7 49.3 Relative (%) -1.8 -4.5 56.2


Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 4,496.2 5,831.4 7,180.9 8,659.6 EBITDA (Rmb mn) 949.0 1,360.7 1,772.6 2,233.5 EBIT (Rmb mn) 902.9 1,300.9 1,698.9 2,144.6 Net profit (Rmb mn) 830.5 1,177.8 1,531.6 1,936.3 EPS (CS adj.) (Rmb) 1.15 1.61 2.10 2.65 Change from previous EPS (%) n.a. - - - Consensus EPS (Rmb) n.a. 1.57 2.02 2.55 EPS growth (%) 44.6 39.9 30.0 26.4 P/E (x) 33.8 24.1 18.6 14.7 Dividend yield (%) 1.5 1.5 1.9 2.4 EV/EBITDA (x) 27.5 19.0 14.1 10.8 P/B (x) 8.92 7.07 5.54 4.36 ROE (%) 29.4 32.6 33.2 33.0 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash


26 October 2016


Hangzhou Robam Appliances Co Ltd (002508.SZ / 002508 CH)

Price (24 Oct 2016): Rmb38.93; Rating: OUTPERFORM; Target Price: Rmb50.30; Analyst: Carey Shi


Sales revenue 4,496 5,831 7,181 8,660 Cost of goods sold 1,900 2,396 2,927 3,503 EBITDA 949 1,361 1,773 2,233 EBIT 903 1,301 1,699 2,145 Net interest expense/(inc.) (66) (74) (90) (118) Recurring PBT 969 1,375 1,789 2,263 Profit after tax 828 1,175 1,529 1,934 Reported net profit 830 1,178 1,532 1,936 Net profit (Credit Suisse) 830 1,178 1,532 1,936


Cash & cash equivalents 2,323 2,622 3,354 4,406 Current receivables 934 1,193 1,547 1,758 Inventories 722 809 1,061 1,138 Other current assets 32 73 38 106 Current assets 4,011 4,697 6,000 7,407 Property, plant & equip. 872 1,115 1,377 1,650 Investments 28 28 28 28 Intangibles 96 90 82 73 Other non-current assets 20 19 17 14 Total assets 5,027 5,948 7,504 9,172 Current liabilities 1,852 1,890 2,329 2,599 Total liabilities 1,860 1,898 2,338 2,608 Shareholders' equity 3,170 4,055 5,175 6,575 Minority interests (3) (6) (8) (11) Total liabilities & equity 5,027 5,948 7,504 9,172


EBIT 903 1,301 1,699 2,145 Net interest 0 0 0 0 Tax paid (141) (200) (260) (329) Working capital 252 (409) (132) (85) Other cash & non-cash items 110 193 164 207 Operating cash flow 1,124 885 1,471 1,938 Capex (278) (295) (326) (350) Free cash flow to the firm 846 590 1,144 1,588 Investing cash flow (306) (295) (326) (350) Equity raised 61 0 0 0 Dividends paid (162) (292) (412) (536) Financing cash flow (101) (292) (412) (536) Total cash flow 717 298 732 1,052 Adjustments 0 0 0 0 Net change in cash 717 298 732 1,052

Per share 12/15A 12/16E 12/17E 12/18E

Shares (wtd avg.) (mn) 720 730 730 730 EPS (Credit Suisse) (Rmb) 1.15 1.61 2.10 2.65 DPS (Rmb) 0.60 0.56 0.73 0.93 Operating CFPS (Rmb) 1.56 1.21 2.01 2.65

Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Sales revenue 26.7 29.7 23.1 20.6 EBIT 45.4 44.1 30.6 26.2 EPS 44.6 39.9 30.0 26.4 Margins (%) EBITDA 21.1 23.3 24.7 25.8 EBIT 20.1 22.3 23.7 24.8

Valuation (x) 12/15A 12/16E 12/17E 12/18E



ROE 29.4 32.6 33.2 33.0 ROIC 89.9 97.9 89.6 92.3



Company Background

Hangzhou Robam is a leading Chinese manufacturer of kitchen appliances, specialising in sterilisers, range hoods, gas stoves, etc.



TP upside – RMB58.7- Our upside scenario assumes 2017 EPS to be 5% higher than our base case driven by faster market share gain and margin improvement. Our TP is based on +2 standard deviation above market average.


TP downside – RMB42 – Our downside scenario assumes 2017 EPS to be 5% below our base case on weaker kitchenware market and rising competition. Our TP is based on industry average.






26 October 2016



Figure 183: Robam has the largest built-in

kitchenware sales of public companies (2015) Figure 184: Robam’s revenue breakdown (1H16)

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

Figure 185: Robam lags white-good top players in

share of volume

Figure 186: We see further room for margin

improvement


Figure 187: Robam has a high advertisement

spending ratio

Figure 188: Robam is trading at par with the industry

average

Source: Company data, Credit Suisse research Source: Bloomberg, Credit Suisse research

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Robam Vanward vatti Macro Midea Meida

Rmb bn

Range hood58%

Gas stove28%

Disinfecting cabinet

7%

Small appliances and

others7%

710

3033

43

0

5

10

15

20

25

30

35

40

45

50

Robam in gasstove

Robam inrange hood

Haier in Fridge Haier in washer Gree in AC

%

52.5% 53.6% 54.4%56.5% 58.2% 59.3% 59.7% 60.0%

12.6% 14.1% 15.4%17.3%

19.9%22.1% 23.4% 24.5%

12.2% 13.7% 14.5% 16.0%18.3% 20.0% 21.1% 22.1%

0.0%

10.0%

20.0%

30.0%

40.0%

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60.0%

70.0%

2011 2012 2013 2014 2015 2016E 2017E 2018E

GPM OPM NPM

9%8%

8%

6%

4%

1% 1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Robam Supor Joyoung Vatti GuangdongTonze

Vanward Macro9.0

14.0

19.0

24.0

29.0

34.0

Jan11

Apr11

Jul11

Oct11

Jan12

Apr12

Jul12

Oct12

Jan13

Apr13

Jul13

Oct13

Jan14

Apr14

Jul14

Oct14

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Apr15

Jul15

Oct15

Jan16

Apr16

Jul16

Oct16

Mean+2 std

Mean+1 std

Mean

Mean-1 std

Mean-2 std

Mean 16.2Std 3.3

26 October 2016


Market share taker in a fast growing market

We initiate coverage on Robam with an OUTPERFORM rating and TP of Rmb50.30,

implying 29% potential upside. Robam is our top pick in the kitchenware sector given its

robust earnings growth outlook and undemanding valuation, trading at the industry’s

average valuation yet with the highest market shares, industry-best margins and ROE, and

most promising earnings outlook.

Robam is the leader in built-in kitchenware segment. The company is the market leader in

range hoods (17.4% volume, 25% value), gas stoves (15.4% volume and 22.6% value)

and sterilisers (11.6% volume, 21% value) in urban areas, according to CMM.

We forecast a 28% earnings CAGR over 2016-18E driven by a 22% sales CAGR which is

much faster than the estimated 9% industry-average CAGR. We are aware of investors'

concerns about the sustainability of its high growth and margins. Based on our research

and industry checks, we believe both are sustainable in the next few years.

Expecting market share gains to continue

Robam reported 30% sales CAGR in 2011-1H16 and we expect this strong sales growth

will continue driven by: (1) 9% industry growth; (2) market share gains, as consumers

trade up to better brands for high quality; (3) deeper channel penetration in both high- and

low-tier cities; and (4) robust growth for the new imbedded built-in kitchenware category

including ovens and steamers. The kitchenware segment is still relatively fragmented, as

the market leader, Robam, only has 10/7% volume market shares in range hoods and gas

stoves in China. This compares with 30-40% volume market shares for the market leader

in the white goods category, suggesting room for market consolidation. In addition,

Robam's distributors’ interests are well aligned with those of the company, with the group

announcing a distributor stock plan in August. This drives incentives higher for distributors

to support the company’s growth.

Sustainable margin driven by strong branding and industry trading up

Robam's margins are much higher than those of other large and small appliance

companies in the kitchenware industry. We believe that the high margin is attributed to its

price premium, economies of scale and operating leverage. In our view, the high margin is

sustainable on the back of: (1) an obvious trade-up for large built-in kitchenware products

for their quality and product appearance; (2) its top industry branding; and (3) its highest

investment in marketing and brand building. We expect OPM to expand to 25% in 2018E

from 22% in 2016E, mainly driven by GPM improvement on rising e-Commerce

contribution and operating leverage.

Valuation appears undemanding with its industry best matrices

Robam now trades at 19x 2017E P/E, on par with the industry. We see room for a multiple

re-rating driven by the company’s dominant market shares and best-industry operating

matrix e.g. (2016E: Robam NPM: 20%, industry: 14%; Robam ROE: 28%, industry:19%)

and strongest earnings CAGR for 2016-18 (Robam: 28%, industry: 23%). Considering its

28% earnings CAGR for 2016-18, Robam is trading only at 0.7x PEG compared to the

industry’s 1x PEG.

Our target price of Rmb50.30 is based on 24x 2017E P/E, one standard deviation above

the kitchenware sector P/E and is justified by its best-of-breed performance.

26 October 2016


Expect market share gain to continue

We expect Robam to maintain a 22% sales CAGR in 2016-18E, a slowdown from the 32%

CAGR from 2011-15 given the higher base, but still faster than industry growth as well as

most listed consumer electronic companies.

In our view, this strong growth is expected to be driven by: (1) 9% industry growth; (2)

market share gains as consumer trade up; (3) deepening network penetration in both high-

and lower-tier cities; and (4) robust growth for the new built-in kitchenware category, such

as oven and steamers, which now comprises 3% of group sales.

Kitchenware is still in a growth phase, room for rising

To recap from the previous industry session, the kitchenware segment is still in a growth

phase, with a much lower penetration rate in both rural and urban areas. We expect the

industry to grow at 9% CAGR from 2016-18, faster than the 3-6% growth for the mature

white goods segment.

Figure 189: The kitchenware segment has the

highest forecast CAGR

Figure 190: The kitchenware segment has lower

penetration than for white goods

Source: CMM, IOL, Credit Suisse estimates Note: we use 2014 data for range hood and 2015 data for others due to unavailability of data Source: NBS, Credit Suisse estimate

Market share has room to grow

We see an obvious consumer trade-up to high-end brands in range hoods and gas stoves

(together accounting for 86% of Robam's revenue) in China with industry ASP having

increased 20-30% since 2012. Robam as a leader in the high-end segment has also

witnessed robust market share gains in the past few years.

Consumers have shown growing interest in range hoods, with higher suction power for

range hoods and gas stoves with rapid and powerful heating. In addition, consumers have

more requirements for the product appearance of built-in kitchen appliances as open

kitchens are more common. We expect this consumer trade-up will continue, as high-end

brands including Robam offer higher functionality and quality, and more importantly are

more stylish.

Compared to the mature white goods segment, the market for range hoods and gas

stoves is still fragmented. Even the No.1 player Robam only has around 10%/7% volume

shares in the range hood and gas stove segments, significantly below the market leaders’

30-40% shares in the white goods segment. We see large market share gain potential for

Robam.

9%

6%

5%

4%

3% 3%

1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%


AC Bathroomelectricalappliance

Fridge Washer TV

0

20

40

60

80

100

120

140

Range hood Color TV Refrigerator AirConditioner

WashingMachine

Urban Rural

26 October 2016


Figure 191: Robam lags white-good top players in

share of volume Figure 192: Robam is gaining market share (volume)

Note: CMM only measure less than 15% of off-line POS, so we use IOL here to compare shipment numbers Source: Company data, IOL, Credit Suisse estimates

Source: CMM

Diversified channels continue to expand

Robam has diversified sales channels, including KA, exclusive stores, B2B, TV shopping

and e-commerce. Offline growth will be mainly driven by expansion to lower-tier cities, in

our view.

At present, Robam covers only 65% of tier-three cities, but close to 100% for first and

second tier ones. Robam will target to reach 80% of tier-three cities by opening up more

exclusive stores in low-tier cities. In order to maintain its high-end brand image, Robam

offers the same set of products across China. The firm only targets affluent consumers in

both urban and rural areas.

The firm has been steadily increasing its exclusive stores over the years. Management

targets to open another 400-500 stores in 2016 and we expect more stores to be open in

the next few years.

Figure 193: Channel sales breakdown (value)

Figure 194: Channel expansion by opening

exclusive stores

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

710

3033

43

0

5

10

15

20

25

30

35

40

45

50

Robam in gasstove

Robam inrange hood

Haier in Fridge Haier in washer Gree in AC

%

10%

11%

13%

15%16%

17%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2013 7M2016

sterilizer gas stove range hood

KA27%

specialty stores28%

e-Commerce30%

TV shopping3%

B2B6%

local supermarket

6%

2,000

2,450

3,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2014 2015 2016E

26 October 2016


Distributors' interests are well aligned

Robam’s headquarters directly manages 82 distributors and sub-distributors (also known

as city companies). Robam used to expand distribution by setting up more first-tier

distributors (from 62 distributors in 2014 to 82 in 2016), but this year the company aims to

maintain distributor numbers and encourage them to open up more city companies

instead.

City companies are usually in tier 3/4 cities. Distributors are encouraged to award city

company managements with shareholdings. In this way, distributors are able to rapidly

expand channel coverage while city company managers receive substantial incentives.

Robam announced a distributor stock plan in August 2015, which is worth 1.5% of

Robam's total share.

Figure 195: Robam's distribution channel


Newly rising built-in kitchenware

Ovens and steamers contribute a small percentage of Robam’s sales. These categories

are growing fast given low penetration rates and a low base. Oven penetration is only

0.2%, compared to 1.5%/3%/9%/15.2% for Taiwan/Japan/Korea/Hong Kong. In 2015,

ovens’ and steamers’ aggregated sales were less than 0.1 mn units, significantly lagging

the 2mn units each for range hoods and gas stoves.

Robam normally bundles other built-in kitchenware with range hoods and gas stoves. If we

assume every one customer in 20 will purchase a bundled set instead of a single product

range hood/gas stove, oven and steamer sales would double.

82 distributorsE-Commerce B2B

Robam

Local channel/exclusive

storesCity companies

26 October 2016


Figure 196: Oven penetration in China significantly lags developed areas

Source: Euromonitor

Figure 197: Gas stoves and range hoods comprise

74% of built-in kitchenware (2015)

Figure 198: High-end brands Robam and Fotile lead

the range hood market (7M16)

Source: CMM, Credit Suisse estimates Source: CMM

Figure 199: High-end brands Robam and Fotile lead

the gas stove market (7M16) Figure 200: Robam gaining market share (volume)


0.2

1.5

3.0

9.0

15.2

0

2

4

6

8

10

12

14

16

China Taiwan Japan Korea Hong Kong

%

dishwasher1%

microwave10%

gas stove28%

range hood46%

sterilizer9%

oven6%

Robam25%

Fotile23%

Midea10%

Vatti9%

Vanward3%Macro

3%Siemens

5%Sacon3%

Others19%

Robam23%

Fotile22%

Midea7%

Vatti12%

Vanward4%

Macro3%

Siemens5%

Others24%

10%

11%

13%

15%16%

17%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2013 7M2016

sterilizer gas stove range hood

26 October 2016


Sustainable margin on strong branding and industry

trade-up

Robam's margin is much higher than other large and small appliance companies in the kitchenware industry. The group's high margin is attributed to its premium pricing, economies of scale and operating leverage on its large revenue scale.

Figure 201: Robam's OPM is expected to reach 25%

in 2018E

Figure 202: Robam has outstanding OPM supported

by a high GPM (2015)


In our view, Robam's high margin is sustainable on 1) an obvious trade up at imbedded kitchenware products for better quality and product appearance, 2) its top industry brandings and 3) its highest investment in marketing and brand building. We expect OPM to expand to 25% in 2018E from 22% in 2016E mainly driven by GPM expansion on rising e-commerce contribution and operating leverage.

Premium brand benefits from consumer trade-up

We see an obvious trading up in the kitchenware segment. ASPs rose 22%36%23% for

gas stoves/range hoods/sterilisers from 2012-1H16. Consumers were upgrading their

kitchen equipment (European-style hoods, large suction power range hoods, and rapid

and powerful heating for gas stoves). High-end brands, such as Robam and Fotile, should

benefit most in this context.

52.5% 53.6% 54.4%56.5% 58.2% 59.6% 59.8% 60.1%

12.6% 14.1% 15.4%17.3%

19.9%21.9% 23.5% 25.0%

12.2% 13.7% 14.5% 16.0%18.3% 20.0% 21.1% 22.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2011 2012 2013 2014 2015 2016E 2017E 2018E

GPM OPM NPM

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

HangzhouRobam

Supor Joyoung Vanward Vatti Macro

26 October 2016


Figure 203: Industry ASPs have been rising steadily

Figure 204: Robam has more than a 40% price

premium over the industry average (1H16)


Strong brand recognition

Built-in range hoods and gas stoves are large ticket items and are normally used for 8 -10

years. Therefore, consumers are less price sensitive and willing to pay a brand premium

for better quality. Robam has the one of the strongest brand images in the kitchenware

segment. We believe that its outstanding branding justifies its price premium and will

support ongoing high margins.

We analysed the Baidu index and "Asian top 500 brands" rankings, which both

demonstrate Robam's high brand mindshare and influence. The Baidu index measures

the number of times a word was searched. We found that "Robam range hood" has the

highest daily search queries among competitors from 2012-15.

Another measure is "Asian top 500 brands" which rank the most influential brands by

World Brand Lab. Robam is the only Chinese kitchenware brand that was selected in the

top 500 for the past 10 years. In 2015 and 2016, Robam, ranked 265 and 262, the highest

among Chinese kitchenware brands.

Figure 205: Robam range hood has the highest daily search queries at Baidu

index

2011 2012 2013 2014 2015

Robam 218 265 495 420 440

Fotile 188 218 239 360 420

Vatti 153 186 233 197 277

Vanward 128 143 149 157 231

Sacon 214 171 219 260 345

Macro 109 177 142 124 195

Canbo 31 107 153 147 216

Chinadee 172 208 199 162 382

Haotaitai 124 146 247 151 166

Source: Baidu index

-

500

1,000

1,500

2,000

2,500

3,000

2012 2013 2014 2015 6M2016


Rmb152

142138

101 100 98

81

71 6862

0

20

40

60

80

100

120

140

160

Fotie Robam Siemens Foreign industry Vatti Midea Haier Macro Vanward

price index

26 October 2016


Figure 206: Robam has a strong brand influence

2015 2016

Ranking Ranking

Haier 30 18

Midea 122 47

Changhong 50 67

Gree 109 72

Robam 265 262

Fotile NA 364

Source: World Brand Lab

Stylish product with better appearance

Besides branding and functionality, product appearance is important with regard to large

built-in kitchenware products. Open kitchens are increasingly common in China; therefore,

range hoods and gas stoves are also part of home furnishings.

Based on end consumer feedback, part of the reason for buying the market leaders,

Robam and Fotile, is due to its stylishness. We believe Robam's stylish product

appearance should help the brand justify its price premium as well as market share gains.

Figure 207: Robam products have stylish appearance

Source: Robam website

Highest investment in marketing and brand building

Robam spent around 8-9% of sales in marketing or Rmb390mn in 2015, which is the

highest in the imbedded built-in kitchenware segment. With its large revenue scale and

high GPM, Robam is able to significantly outspend its competitors to maintain its strong

branding and justify its price premium.

Range hood Gas stove Sterilizer

26 October 2016


Figure 208: Robam has a high advertisement

spending ratio (2015)

Figure 209: Robam has the highest A&P expense

among built-in kitchenware companies (2015)

Note: Joyoung's A&P expense include gift fees. Supor's A&P expense include channel and after-sale expense Source: Company data


Market leaders normally price at a premium for consumer appliances

There is usually a 15-35% price premium for No.1 players in other home appliance sectors

given their top branding and mid- to high-end brand positioning. As Robam focuses on the

high-end segment, with strong branding, better quality, better product appearance and

heavy investment in marketing, we see its price premium is justified.

Figure 210: Top brands have a price premium over industry average

AC Washer Refrigerator Range hood

Domestic average price (Rmb) 3,577 2,750 1,940 2,853

No.1 volume share brand price (Rmb) 4,100 3,647 2,393 4,064

Market share 34% 27% 27.50% 25%

Price premium 15% 33% 23% 42%


E-commerce contributes to high margin

Besides the above, a rising e-commerce contribution is also a key driver for margin

expansion as well as sustainability. Robam directly operates its e-commerce business

which leads to higher margins. Most kitchenware leaders (Robam, Fotile, Vatti and

Vanward) choose to self-operate their e-commerce platforms.

E-commerce now contributes around 30% of Robam's revenue, one of the highest among

peers and 15% above the industry average. Over the past few years, Robam's online

business share has expanded to 30% in 2016 from 10% in 2012. The company expects its

e-commerce share to rise 1% every year from 2017-19 until the number reaches 33%,

which implies 0.2% margin upside annually.

For the built-in kitchenware segment, online products are priced at a 20% discount to off-

line products as they target different customers. Despite the lower ASP, the online channel

earns a 15-20% higher GPM than the traditional off-line channel due to a smaller

distribution layer. We estimate a 70% GPM for Robam’s online business versus 55% for

its offline business. Thus, a rising e-commerce sales contribution should also boost GPM.

9%8%

8%

6%

4%

1% 1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Robam Supor Joyoung Vatti GuangdongTonze

Vanward Macro

392 364

222

4818

902

563

0

100

200

300

400

500

600

700

800

900

1,000

Robam Vanward Vatti Macro GuangdongTonze

Supor Joyoung

Rmb mn

Imbedded kitchenware small kitchenware

26 October 2016


Figure 211: Robam's online/offline scenario

(price) Cost Ex. factory price Retail price GPM

Online 18 64 80 72%

Offline 18 40 100 55%


Figure 212: Robam has the highest online business

share (2015) Figure 213: e-Commerce share growth

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

Figure 214: Imbedded kitchenware has the highest channel mark up

TV <20%

White goods 20%-30%

Small appliances 30%-50%

Imbedded kitchenware >60%


Valuation appears inexpensive with its industry best

matrices

Robam now trades at 19x 2017E P/E, at par to the industry. We see room for multiple re-

rating driven by its dominant market shares and best industry operating matrix e.g.

(2016E: Robam NPM: 20%, industry: 14%, Robam ROE: 29%, industry:19%) and

strongest earnings CAGR in 2016-18 ( Robam : 28%, industry: 23%). Considering its 28%

earnings CAGR in 2016-18, Robam is trading only at 0.7 PEG compared to industry at 1

PEG.

Our TP of Rmb50.30 is based on 24x 2017E P/E, which is equivalent to one standard

deviation above kitchenware sector P/E, which is justified in our view by its best of breed

performance.

0%

5%

10%

15%

20%

25%

30%

35%

Robam Vatti Vanward Industry0%

5%

10%

15%

20%

25%

30%

35%

40%

2012 2013 2014 2015 2016E 2017E 2018E

26 October 2016


Figure 215: Robam has an outstanding performing matrix among the

kitchenware segment

Hangzhou

Robam

Supor Joyoung Vatti Vanward Macro

Sales CAGR 13-15E 30.90% 14.10% 15.10% 0.10% 6.50% 33.70%

Earnings CAGR 13-15E 46.80% 22.90% 14.90% -3.70% 13.50% -17.70%

GPM 2015 57.70% 28.50% 31.40% 38.10% 30.50% 31.30%

OPM 2015 19.70% 10.00% 9.90% 5.30% 7.30% 5.10%

NPM 2015 18.50% 8.20% 8.80% 5.60% 7.70% 3.00%

ROE 2015 29.40% 21.70% 19.50% 13.90% 11.80% 9.30%

ROIC 2015 54.00% 25.60% 29.90% 12.60% 10.80% 6.00%


Risks

Whilst we have highlighted Robam's competitive advantage and potentials above, we also

see below risks to our target price and rating

■ Network expansion slowdown. Robam currently has around 2,500 stores. It aims to

open 500 more stores and reach 3,000 stores this year. Slower network expansion

may affect sales growth.

■ Slower economy and weak property cycle. A slower property and weak economy may

reduce spending on home appliances or even delay refurbishment.

■ Raw material price increases. If raw material prices unexpectedly increase, the GPM of

company would be put under pressure.

In our view, a slower economy and weak property cycle are not major risks to the

company, as we view Robam as having an outstanding track record in a property

downturn cycle, and its penetration is relatively low compared to white goods. We see a

larger threat from rising raw material costs. We expect the company to alleviate any

negative impact from rising raw material costs through product innovation and a better

product mix.

Company background

Robam was established in 1979 in Zhejiang, China, focusing on Chinese kitchen

appliances. Company has No.1 market share in range hoods and gas stoves. The

company was listed on the Shenzhen Stock exchange in 2010. Robam also has sub

brands "Mingqi" and "Dize" to target the low-end and luxurious kitchenware markets.

Figure 216:Robam has the largest market share in the gas stove and range hood segments (by volume)


Share Rank Share Rank Share Rank

Robam 15% 1 17% 1 11% 3

Fotile 14% 2 15% 2 12% 2

Canbo 2% 11 2% 12 22% 1

Simens 4% 8 4% 8 5% 7

Vanward 6% 5 5% 5 7% 5

Vatti 11% 4 9% 4 5% 6

Sacon 2% 9 3% 9 1% 17

Haier 4% 7 4% 7 2% 10

Midea 11% 3 11% 3 11% 4


26 October 2016


Management

Ren Jianhua (age 60), Chairman. Mr. Ren has over 38 years of working experience. He

worked as sales department head and manager of Yu Hang Hong Xing Hardware Factory

(Robam's predecessor). Mr. Ren is also a Hangzhou's People's Congress member.

Ren Fujia (age 33), Vice-Chairman and general manager. Mr. Ren’s previous roles

include the group's marking department manager, deputy manager of the R&D centre and

deputy general manager of the group, etc. Mr. Ren holds a bachelor degree.

Zhao Jihong (age 54), a board director of the company. Prior to this, Mr. Zhao held

various senior management positions in the listed company and related entities. Mr. Zhao

holds a master’s degree.

Ren Luozhong (age 54), a board director of the company. Prior to this position, Mr. Ren

held various senior management positions in the listed company and related entities. Mr.

Ren holds an EMBA degree.

Wang Gang (age 41), board director, deputy general manager, board secretary and

director of investment. Prior to joining Robam, Mr. Wang held various senior positions in

other listed/private companies. Mr. Wang is a CFA and holds a master degree.

Shen Guoliang (age 51), board director. Mr. Shen was Robam Group's director, CFO,

deputy general manager and head of transportation department of Yu Hang Hong Xing

Hardware Factory. Mr. Shen has over 34 years of working experience.



Note: As of 30 Jun 2016 Source: Company data, Credit Suisse research,

Robam Appliances老板电器

(002508.SZ)

Ms. Shen Guoying (Chairman’s spouse)

Public

46.86%

75.00%

Disinfection cabinet

Robam GroupJinchuang Investment

Other kitchenware

Mr. Ren Jianhua(Chairman)

69.19%

49.86% 0.69% 1.11% 1.48%

Range hoods Gas stove

26 October 2016



Joyoung Co Ltd (002242.SZ / 002242 CH) Rating NEUTRAL [V] Price (24 Oct 16, Rmb) 19.81 Target price (Rmb) 21.50 Upside/downside (%) 8.5 Mkt cap (Rmb/US$ mn) 15,206 / 2,245 Enterprise value (Rmb mn) 14,103 Number of shares (mn) 767.58 Free float (%) 51.8 52-wk price range (Rmb) 26.50-14.91 ADTO-6M (US$ mn) 20.8 *Stock ratings are relative to the relevant country benchmark.


[V] = Stock Considered Volatile (see Disclosure Appendix)

Research Analysts

Carey Shi

852 2101 7729

[email protected]

Raymond Ching

852 2101 7852

[email protected]

In the middle of category transitioning

■ We initiate coverage on Joyoung with a NEUTRAL rating and TP of

Rmb21.50. Joyoung is a leading small kitchen-appliance brand in China. In

our view, the company is in the middle of a category transition phase which

should cap its earnings growth and reduce visibility in the next two years. We

expect 11% earnings growth from 2016-18, slower than industry peers’.

Valuation and earnings outlook are not attractive, in our view.

■ Product category transitioning. We expect strong sales momentum for its

Western small appliance and nutritious pot category (IH rice cookers) (~45%

sales) driven by a low penetration rate and rising requirements for food

quality. However, weak soymilk machine and induction cooker (40% of sales)

sales, which are in an industry declining phase, would drag on overall

revenue growth in 2017/18E.

■ Stable margin outlook. We expect core OPM to be largely stable in

2017/18. We expect the GPM to see marginal erosion due to the lower sales

mix of higher margin soymilk machines (10% above average). On the positive

side, the negative effect will be offset by a lower A&P ratio by allocating more

advertising to the social media channel and adding more offline experience

stores, while reducing the expensive TV channel.

■ Valuation is rich, but dividend yield is high. Joyoung trades at 20x P/E,

largely in line with the kitchenware industry. Although its 11% earnings CAGR

is slower than the industry’s, it makes one of the highest ROE/NPM and

dividend yields of 4%, which in our view justifies it trading on par with the

industry’s P/E. Our TP of Rmb21.50 is based on 21.5x 2017E P/E, which is in

line with industry peers’. Risks: (1) raw material price hikes; (2) a sharp

decline in mature product sales; and (3) quality issues.





was Rmb6.77/US$1

Performance 1M 3M 12M Absolute (%) 0.7 -2.8 -21.8 Relative (%) -0.9 -4.6 -15.0


Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 7,060.1 7,732.7 8,715.1 9,751.2 EBITDA (Rmb mn) 864.8 971.0 1,074.2 1,177.4 EBIT (Rmb mn) 781.9 878.2 969.6 1,060.3 Net profit (Rmb mn) 620.0 693.2 776.8 861.9 EPS (CS adj.) (Rmb) 0.81 0.90 1.01 1.12 Change from previous EPS (%) n.a. - - - Consensus EPS (Rmb) n.a. 0.92 1.05 1.20 EPS growth (%) 16.6 11.8 12.1 10.9 P/E (x) 24.5 21.9 19.6 17.6 Dividend yield (%) 3.5 2.7 3.1 3.4 EV/EBITDA (x) 16.3 14.5 12.9 11.5 P/B (x) 4.64 4.43 4.01 3.63 ROE (%) 19.5 20.7 21.5 21.6 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash


26 October 2016


Joyoung Co Ltd (002242.SZ / 002242 CH)

Price (24 Oct 2016): Rmb19.81; Rating: NEUTRAL; Target Price: Rmb21.50; Analyst: Carey Shi


Sales revenue 7,060 7,733 8,715 9,751 Cost of goods sold 4,855 5,262 5,964 6,731 EBITDA 865 971 1,074 1,177 EBIT 782 878 970 1,060 Net interest expense/(inc.) (9) (14) (15) (19) Recurring PBT 791 892 985 1,079 Profit after tax 671 748 832 917 Reported net profit 620 693 777 862 Net profit (Credit Suisse) 620 693 777 862


Cash & cash equivalents 1,148 1,092 1,330 1,657 Current receivables 1,650 1,826 2,058 2,302 Inventories 538 551 624 704 Other current assets 1,041 1,045 1,046 1,049 Current assets 4,377 4,513 5,057 5,713 Property, plant & equip. 697 728 763 802 Investments 574 574 574 462 Intangibles 160 148 134 118 Other non-current assets 82 80 78 189 Total assets 5,891 6,043 6,607 7,284 Current liabilities 2,508 2,450 2,597 2,823 Total liabilities 2,532 2,474 2,621 2,847 Shareholders' equity 3,275 3,431 3,792 4,188 Minority interests 83 138 194 249 Total liabilities & equity 5,891 6,043 6,607 7,284


EBIT 782 878 970 1,060 Net interest 0 0 0 0 Tax paid (120) (143) (152) (162) Working capital 166 (250) (159) (102) Other cash & non-cash items 33 75 84 96 Operating cash flow 861 560 742 893 Capex (71) (108) (122) (137) Free cash flow to the firm 790 452 620 756 Investing cash flow (855) (79) (88) (99) Equity raised 6 0 0 0 Dividends paid (547) (537) (416) (466) Financing cash flow (233) (537) (416) (466) Total cash flow (227) (56) 237 327 Adjustments 0 0 0 0 Net change in cash (227) (56) 237 327

Per share 12/15A 12/16E 12/17E 12/18E

Shares (wtd avg.) (mn) 768 768 768 768 EPS (Credit Suisse) (Rmb) 0.81 0.90 1.01 1.12 DPS (Rmb) 0.70 0.54 0.61 0.67 Operating CFPS (Rmb) 1.12 0.73 0.97 1.16

Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Sales revenue 18.8 9.5 12.7 11.9 EBIT 5.6 12.3 10.4 9.4 EPS 16.6 11.8 12.1 10.9 Margins (%) EBITDA 12.2 12.6 12.3 12.1 EBIT 11.1 11.4 11.1 10.9

Valuation (x) 12/15A 12/16E 12/17E 12/18E



ROE 19.5 20.7 21.5 21.6 ROIC 31.6 31.4 31.9 33.2



Company Background

Joyoung Co., Ltd is a China-based company principally engaged in the research, development, production and distribution of soymilk makers and small kitchen appliances.



TP upside – RMB25.5 – Our upside scenario assumes 2017 EPS to be 5% higher than our base case on stronger rice cooker and western appliance sales. Our TP is based on +1 standard deviation above market average.


TP downside- RMB14.5 – Our downside scenario assumes 2017 EPS to be 5% below our base case on weaker sales and larger than expected drop in soybean machine sales. Our TP is based on -1 standard deviation to market average.






26 October 2016


Focus charts and Tables

Figure 218: Joyoung’s revenue breakdown (2015)

Figure 219: IH rice cookers are becoming more

popular


Figure 220: Joyoung’s IH rice cooker sales volume

tripled in 2015

Figure 221: Joyoung is the second-largest rice

cooker brand (2015)

Source: CMM Source: CMM, Credit Suisse estimates

Figure 222: Soymilk makers’ slow growth has

negative impact on gross margin

Figure 223: Joyoung is trading at one standard

deviation above the historical average

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

Food processor

50%

Nutritious pot 28%

Western small appliance

8%

Induction cooker11%

7%

13%

21%

33%

0%

5%

10%

15%

20%

25%

30%

35%


0.3

0.9

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2014 2015

mn units

Midea41%

Joyoung27%

Supor14%

Others18%

70%

40%38%

32%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2008 2015

soymilk machine % GPM

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Jan

11

Ap

r11

Jul1

1

Oct1

1

Jan

12

Ap

r12

Jul1

2

Oct1

2

Jan

13

Ap

r13

Jul1

3

Oct1

3

Jan

14

Ap

r14

Jul1

4

Oct1

4

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15

Ap

r15

Jul1

5

Oct1

5

Jan

16

Ap

r16

Jul1

6

Oct1

6

Mean+2 std

Mean+1 std

Mean

Mean-1 std

Mean-2 std

Mean 14.5Std 5.1

26 October 2016


Product category transitioning

We expect strong sales momentum for its western small appliance and nutritious pot

category (IH rice cooker) (~45% sales) driven by low penetration rate and rising

requirement for food quality. Joyoung is transitioning from a soybean machine producer to

multi-category brand, including built-in kitchenware, small kitchenware, and water heater.

Rice cooker will be the next highlight for the company. Currently Joyoung is the No.2 rice

cooker brand in China with 10% revenue generated from that category. We see a major

upgrade trend for IH rice cookers from non-IH ones. IH rice cookers volume share and

value share increased 6%/10% respectively in 2015. Joyoung's "Tiefu" IH rice cooker has

tripled sales in 2015 and company recently launched a RMB900mn private placement plan

for IH rice cooker capex. We expect a 21%/30% CAGR for nutritious pot and western

small appliances segments in 2016-18, respectively.

However, soymilk machine and induction cooker (40% of sales) sales are in an industry

declining phase due to consumer preference change and longer replacement cycles. We

expect 4%/-2% sales CAGR for food processor and induction cooker categories in 2016-

18, respectively, which would drag weight on overall revenue growth in 2017/18E.

Figure 224: Joyoung has complete product offering

Source: Company website

soybean machine blender food processor electric kettle One Cup

rice cookerelectric pressure

cooker

Induction

cookernoodle maker

pastry

makerOven Air fry machine

pot water purifier range hood gas stove sterilizer wataer heater

26 October 2016


Figure 225: We see IH rice cooker is becoming

more popular in China

Figure 226: Joyoung's "Tiefu" IH rice cooker has

tripled sales in 2015


Stable margin outlook

Overall OPM should be stable in 2017/18. Soymilk machine has 10% more GPM than

other products due to Joyoung's dominant market share and strong pricing power. Soymilk

machine's share dropped from around 80% in 2008 to around 30% now. As share of

soymilk machine decreased, we see slight margin erosion.

Positively, management will spend more resources on social media and off-line

experiencing stores for promotion than traditional off-line retail stores. Therefore, we see

lower A&P ratio going forward. We expect A&P ratio dropped from 8% in 2015 to 7.5% in

2018E.

Figure 227: Soymilk maker (included in food

processor ) has around 10% margin premium than

other products (1H16)

Figure 228: Margin has been negatively affected by

soymilk machine share decrease

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

Valuation

Our TP of Rmb21.50 is based on 21.5x 2017E P/E, which is in line with industry peers.

Joyoung now is trading at 20x P/E, largely in line with the kitchenware industry.

Although its 11% earnings CAGR is slower than the industry’s, it makes one of the

highest ROE/NPM and dividend yields of 4%, which in our view justifies it trading on

par with the industry’s P/E.

6.7%

12.6%

21.1%

32.6%

0%

5%

10%

15%

20%

25%

30%

35%


0.3

0.9

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2014 2015

mn units

38%

30%29% 28%

25%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Foodprocessor

Western smallappliance

Nutritious pot Inductioncooker

Otherappliance

35.4% 35.0% 34.4%32.6% 31.9% 32.5% 32.2% 31.6%

13.0% 12.5% 12.7% 12.5%11.1% 11.4% 11.1% 10.9%

9.6% 9.2% 8.8% 8.9% 8.8% 9.0% 8.9% 8.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2011 2012 2013 2014 2015 2016E 2017E 2018E

GPM OPM NPM

26 October 2016


Risks

We see below risks to our rating and TP:

Intensifying competition. Although Joyoung has a strong position in the

kitchenware segment, it is not the no.1 player. If competitors decide to change

pricing strategy, Joyoung may have to follow, which could cause margin erosion.

Slower economy. A slower economy may reduce spending on home appliances

in general.

Raw material price increases. Unexpected raw material price increases could

have a negative impact on the company's margin. We believe Joyoung would

reduce such impact by improving its product mix and having greater product

differentiation.

Management

Wang Xuning (age 47), has been the company's chairman and general manager since

the company’s establishment. Mr. Wang holds an MBA degree from CEIBS.

Huang Shuling (age 52),has been the company's vice-chairman since the company’s

establishment. Ms. Huang is also the chairman of Shandong Joyoung Development, and

executive director and general manager of Shanghai Li Hong. Ms. Huang holds an MBA

degree from CKGSB.

Jiang Guangyong (age 46), a board director of the company. Before this, Mr. Jiang was

the board secretary. Mr. Jiang also holds various senior management positions in

Joyoung's related entities. Mr. Jiang holds an MBA degree from CKGSB.

Yang Ningning (age 37), a board director and deputy general manager of the company.

She was in charge of the group's financials before. Ms. Yang is a CFA and holds a BS

from Shandong Economics University.

Jiao Shuge (age 50), a board director. Mr. Jiao is also a director of CDH Investment

Management (Hong Kong ) Ltd. Mr. Jiao holds an MS degree from the Ministry of

Aerospace Industry Second Research Institute.



Note: As of 06/30/2016 Source: Company data, Credit Suisse estimates

Joyoung 九阳股份

(002242.SZ)

BILTING Development Public

37.79%

75.43%

Shanghai Lihong New Technology Investment上海力鸿新技术投资有限公司

Founders – Wang Xuning, Zhu Hongtao, Huang Shuling & Zhu Zechun

(王旭宁、朱宏韬、黄淑玲、朱泽春四人创业团队)

46.04% 16.17%

26 October 2016


Companies Mentioned (Price as of 24-Oct-2016) Conair (CNGA.PK, $0.35) Gree Electric Appliances Inc of Zhuhai (000651.SZ, Rmb22.55, OUTPERFORM, TP Rmb28.0) Haier Electronics Group Co., Ltd. (1169.HK, HK$12.72, NEUTRAL, TP HK$13.4) Hangzhou Robam Appliances Co Ltd (002508.SZ, Rmb38.93, OUTPERFORM, TP Rmb50.3) Joyoung Co Ltd (002242.SZ, Rmb19.81, NEUTRAL[V], TP Rmb21.5) LG Corp (003550.KS, W62,700) Macro (000533.SZ, Rmb11.87) Midea Group Co Ltd (000333.SZ, Rmb26.66, OUTPERFORM, TP Rmb34.5) Panasonic (6752.T, ¥1,079) Philips (PHG.AS, €27.32) Procter & Gamble Co. (PG.N, $84.1) Qingdao Haier Co., Ltd. (600690.SS, Rmb10.29, OUTPERFORM, TP Rmb12.3) Stanley Black & Decker, Inc. (SWK.N, $119.52) Supor (002032.SZ, Rmb36.89) Vanward (002543.SZ, Rmb17.75) Vatti (002035.SZ, Rmb24.9)

Disclosure Appendix

Important Global Disclosures I, Raymond Ching, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Gree Electric Appliances Inc of Zhuhai (000651.SZ)

000651.SZ Closing Price Target Price

Date (Rmb) (Rmb) Rating

23-Oct-14 13.78 19.50 O

24-Oct-14 13.67 *

31-Oct-14 14.20 20.75 O

12-Jan-15 21.10 29.00

30-Apr-15 28.50 33.00

31-Aug-15 18.45 26.20

27-Oct-15 17.58 23.00

02-Nov-15 17.64 24.00

30-Aug-16 19.22 NC

* Asterisk signifies initiation or assumption of coverage.

Effective July 3, 2016, NC denotes termination of coverage.

O U T PERFO RM

N O T CO V ERED

3-Year Price and Rating History for Haier Electronics Group Co., Ltd. (1169.HK)

1169.HK Closing Price Target Price

Date (HK$) (HK$) Rating

21-Jan-14 24.05 30.00 O *

14-Jul-14 21.85 27.60

27-Aug-14 21.50 26.80

28-Aug-14 21.95 25.50

26-Aug-15 15.14 20.00

12-Jan-16 12.88 19.00

23-Mar-16 12.70 18.50

30-Aug-16 13.14 NC



O U T PERFO RM

N O T CO V ERED

26 October 2016


3-Year Price and Rating History for Midea Group Co Ltd (000333.SZ)

000333.SZ Closing Price Target Price


23-Oct-14 13.53 20.00 O

24-Oct-14 13.34 *

15-Dec-14 17.45 20.00 O

07-Jan-15 21.10 28.00

31-Mar-15 21.97 26.67

29-Apr-15 24.97 31.13

31-Aug-15 19.19 28.67

27-Oct-15 18.25 27.33

30-Aug-16 26.87 NC



O U T PERFO RM

N O T CO V ERED

3-Year Price and Rating History for Qingdao Haier Co., Ltd. (600690.SS)

600690.SS Closing Price Target Price


23-Oct-14 7.70 11.00 O

24-Oct-14 7.76 *

31-Oct-14 8.26 11.55 O

12-Jan-15 10.20 13.50

31-Mar-15 12.92 13.50 N

31-Aug-15 10.04 11.00

27-Oct-15 9.92 10.00

02-Nov-15 9.92 9.80

30-Aug-16 10.31 NC



O U T PERFO RM

N EU T RA L

N O T CO V ERED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential with in an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform whe re an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 Ju ly 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

26 October 2016


Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 55% (54% banking clients) Neutral/Hold* 30% (24% banking clients) Underperform/Sell* 15% (40% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Gree Electric Appliances Inc of Zhuhai (000651.SZ)

Method: Our target price of RMB28 is based on a 10.5x 2017E P/E, which is in line with the white goods sector average. We believe Gree's outlook is promising with improved AC inventory and robust export sales. At our target price, Gree would be trading at 1x PEG or only 5x ex-cash 2017E P/E which suggests our valuation is not demanding, and hence we have an Outperform rating.

Risk: Risks to our RMB28.0 target price and Outperform rating for Gree Electric Appliance include 1) slower growth of white appliances in China, 2) over-reliance on a single sector and lack of diversification, 3) product quality and service issues, especially when the company increased its overseas exposure where policies and rules are more stringent, 4) intensified competition and price wars, and 5) the shareholding overhang.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Haier Electronics Group Co., Ltd. (1169.HK)

Method: We give a NEUTRAL rating to Haier Electronics. Our TP of HK$13.40 is based on 11x P/E (price-to-earnings), which is referenced to industry average. Haier Electronics's earnings CAGR is slightly behind industry average, but the similar-to-industry multiple is justified by its unique integrated channel services (40% of the 2017 operating profit) which has a higher long term prospect than the traditional white good sector. We expect this segment to benefit from China's robust e-Commerce growth.

Risk: Upside risks to our HK$13.40 target price and NEUTRAL rating for Haier Electronics Group Co., Ltd. include better than expected washing machine growth. Downside risks include an economic and/or end market demand slowdown, regulatory policy changes, third-party brand sales growth, possible raw material and/or labor cost hikes, the failure of working capital controls, as well as corporate governance risks from connected party transactions.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Hangzhou Robam Appliances Co Ltd (002508.SZ)

Method: We give a OUTPERFORM rating to Robam. Our target price of Rmb50.30 is based on 24x 2017E P/E (price-to-earnings), which is equivalent to one standard deviation above kitchenware sector P/E, which is justified in our view by its best of breed performance. Robam now trades at 19x 2017E P/E, at par to the industry. We see room for multiple re-rating driven by its dominant market shares and best industry operating matrix e.g. (2016E: Robam NPM: 20%, industry: 14%, Robam ROE: 29%, industry:19%) and strongest earnings CAGR in 2016-18 ( Robam : 28%, industry: 23%). Considering its 28% earnings CAGR in 2016-18, Robam is trading only at 0.7 PEG compared to industry at 1 PEG.

Risk: Risks to our Rmb50.30 target price and OUTPERFORM rating for Hangzhou Robam Appliances Co Ltd include 1) raw material hike, 2) sharp decline in matured product sales and 3) intensified competition from big Home appliance players and 4) weaker property cycle.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Joyoung Co Ltd (002242.SZ)

Method: Our target price 21.50 is based on 21.5x 2017E P/E, which is largely in line with industry peers multiple. In our view, the company is in the middle of category transition phase which will likely to cap its earnings growth and reduce visibility in the next two years. We expect 11% earnings growth in 2016-18, slower than industry peers. Valuation is not cheap at 1.8x 2017 PEG, but its 4% dividend yield and one of the best margins and ROEs in the industry should provide good share price supports.

26 October 2016


Risk: Risks to our TP 21.50 and NEUTRAL rating include: 1) intensifying competition 2) slower economy and 3) raw material price increases.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Midea Group Co Ltd (000333.SZ)

Method: Our target price of RMB34.50 is based on a target 13x 2017E P/E, which is one standard deviation above the white good sector. The valuation premium is warranted by its stronger earnings outlook and above industry ROE and NPM. It also has multiple possible synergies from Toshiba and Kuka and the broadest product category. At our target price, the stock will be also trading at 0.8x PEG, which suggests our valuation is not demanding given the company's earnigns growth potential.

Risk: Risks to our Rmb34.50 target price and Outperform rating for Midea Group include 1) home appliance consumption trends change 2) adverse price competition and 3) volatile raw material price.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Qingdao Haier Co., Ltd. (600690.SS)

Method: Our target price of Rmb12.30 for Qingdao Haier Co., Ltd. is based on a 2017E P/E (price-to-eanings) of 13x, which is one standard deviation above industry average, which we believe is justified by its stronger earnings outlook, margin and ROE. We have an Outperform rating as we see stronger organic sales growth driven by industry-wide AC inventory improvements, strong export sales owing to RMB depreciation, the inclusion of GEA as well as associated synergies as potential share price catalysts.

Risk: Risks to our Outperform rating and Rmb12.30 target price for Qingdao Haier Co., Ltd. include raw material price volatility, worse-than-expected industry growth, and price competition.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (000333.SZ, 600690.SS, 1169.HK, 003550.KS, 6752.T, PHG.AS, SWK.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (003550.KS, SWK.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (003550.KS, SWK.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (002242.SZ, 000333.SZ, 600690.SS, 1169.HK, 003550.KS, 6752.T, PHG.AS, SWK.N) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (6752.T, SWK.N). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (003550.KS).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=265886&v=-5351uqjtwmd5nyfqowr8b9ilf .

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (PHG.AS). As of the end of the preceding month, the subject company (SWK.N) beneficially owned 5% or more of the total issued share capital of Credit Suisse Group. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (SWK.N) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse (Hong Kong) Limited .............................................................................................................................. Raymond Ching ; Carey Shi To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited .............................................................................................................................. Raymond Ching ; Carey Shi

https://rave.credit-suisse.com/disclosures/view/report?i=265886&v=-5351uqjtwmd5nyfqowr8b9ilf

26 October 2016


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26 October 2016


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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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