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Analyst Research Report Snapshot


Haier Electronics Group (1169.HK): Upgrade to Buy




Sun Hung Kai Financial


18 Dec 2013





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* We upgrade our recommendation to Buy, revise up our 2015 EPS by HK$0.01 to HK$1.49 and raise our target price from HK$20.00 to HK$26.00. Our target price is based on 17.5X our 2015 EPS of HK$1.49 and is in line with our DCF value of HK$26.90. * Haier Electronics has announced that a tie-up with Alibaba, which is investing HK$2.8bn into the company through a 2% position in Haier Electronics, a 9.9% holding in its Logistic business, and subscribing to a convertible and exchangeable bond that can convert into a 24.1% holding in the Logistics business or a further 2.5% of Haier Electronics. The company is now being backed by three important strategic investors: KKR, Carlyle and Alibaba. KKR owns 10% of the immediate parent company while Carlyle and Alibaba have 9% and 4.5% holdings respectively in Haier Electronics (if Alibaba converts its bond). * This provides the company with greater credibility, due to the increase in external investor supervision to counterbalance the large parent company holding, and useful consultation for the execution of its expansion plans. Alibaba brings greater comfort for the long-term growth outlook, for which we believe investors will be willing to pay a higher valuation, and it expedites the growth of the Logistic business, which has net margins of 4%-5% vs. 1% for distribution. Therefore, overall ICS division net margins should trend up as Logistic increases its share of revenues – currently only 10%. * We regard this venture with Alibaba as of immense strategic importance to the company and providing the next leg of growth for the company, but it does not materially change our assumptions for the business over the next two years since we were already positive on ICS growth and our revenue estimates were already higher than consensus. We are keeping our sales for 2014 flat and increasing 2015 by 2%. EPS for 2014 is reduced by HK$0.01 due to dilution, but we raise 2015 by HK$0.01 to HK$1.49. We believe Alibaba increases the long-term growth potential and provides a greater degree of visibility into the business outlook. We now have a greater degree of comfort using our DCF model to back up our valuation of the company. 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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