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Analyst Research Report Snapshot


Haier Electronics Group (1169.HK): Downgrade to Neutral on Valuation




Sun Hung Kai Financial


25 Nov 2013





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* We are rolling forward to 2015 earnings and upgrade our target price to HK$20.00 based on 14X our 2015 estimate of HK$1.48. However we downgrade our recommendation to Neutral due to limited upside (+7%) to our target. We are positive on the company’s outlook, which is reflected in our estimates, but believe the recent move in the stock price has started to discount our positive thesis. * We have increased our revenue assumptions for 2013 and 2014 from RMB 62.9bn and RMB 72.3bn to RMB 63.3bn and RMB 74.1bn respectively, due to stronger than expected growth in washing machines and bolt-on logistic acquisitions. However we have become a little more conservative in our outlook for margins for ICS, as the company’s short-term acquisition strategy may hold back the improvement that we would expect from an increase in the volumes of third-party brands. For 2013 and 2014 we have slightly reduced our assumptions for ICS operating margins from 1.92% and 2.17% to 1.88% and 2.10%. * We continue to believe that the long-term outlook for the company remains positive. The distribution network into rural areas is an important competitive advantage, which the company is successfully leveraging to distribute more third-party brands. In addition, the “Haier” brand is doing well both in China and internationally and with both Carlyle and KKR (at the parent level) involved, the credibility of the company among international investors is on the rise. * The company’s entry into the new market of third-party furniture and bathroom logistics is an interesting opportunity and could lead to a deal with a major ecommerce platform, for logistics and assembly. Not only would this take the company into a new product category but it would also move it from B2B into B2C, which could open up further opportunities in the future. We await further details to gauge the impact to our estimates. * Conclusion: Haier Electronics’ business model is transitioning to logistics and distribution, as we expected. This network is becoming an important part of the consumer supply chain, forcing third-party brands to utilize their platform to get access to consumers beyond the top tier cities. The credibility of the company is building up amid international private equity involvement. However, the stock price has started to discount much of the good news and we await further details about its expansion into large-item home products and ecommerce logistics and its impact on margins. Analyst contact: (852) 3929 6156, nicholas.studholme@shkf.com Institutional research and sales contacts: (852) 3929 6154, stephen.yang@shkf.com (852) 3920 2676, richard.seaward@shkf.com

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