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Haier Electronics Group (1169.HK): FY13 Review




Sun Hung Kai Financial


27 Mar 2014





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* FY2013: The company reported FY13 numbers in line with consensus, but below our estimates. Revenues were up 12% Y/Y to RMB 62.3bn and EPS of RMB 0.781 versus the consensus of RMB 62.8bn and RMB 0.787 and our estimates of RMB 63.2bn and EPS RMB 0.81. The main difference between our estimates and actual numbers was due to our estimate of growth rate in the ICS division of 14.5% versus actual growth of 13.4%. Cash flow from operations was up 26% and overall net cash RMB 4.6bn to RMB 5.9bn. * Demand for washing machines and water heaters decelerated in 2013, due to higher penetration rates and a slowdown in the export market for washing machines. Sales growth for washing machines decelerated from 8.7% in 2012 to 7% in 2013, although domestic sales maintained healthy growth of 10%. Water heaters decelerated from 17% growth in 2012 to 11% in 2013. According to the Ministry of Commerce overall home appliance sales grew 11% in 2013. However slower new user demand is being offset by replacement demand and a trend to upgrade to higher-end, e.g. front-load washing, machines. * Positives: 1) Good overall margin improvement. Operating margin improved 20 bps to 4.24% driven by a 40 bps improvement in ICS and washing machines, although partly offset by a 15 bps decline in water heaters. 2) ICS top line growth of 13.4% translating into strong operating profit growth of 43%. 3) Good cash generation, which should allow the company to pursue its growth strategy. * Negatives: 1) Payout ratio of 10% continues to be poor and building up cash is starting to drag down return on equity. 2) Washing machine exports are likely to continue to be a headwind to growth, especially if the Yen continues to weaken. * Forecasts: Due to the slightly slower than expected growth rate in revenues in 2013, we are slightly reducing our sales and EPS forecasts for 2014 from RMB74.2bn/RMB0.96 to RMB72.3bn/RMB0.91 and 2015 from RMB87.7bn/RMB1.17 to RMB86bn/RMB1.11. Our new target price is HK$24.80, based on 17.5X our 2015 estimate of HK$1.42/RMB1.11. * Outlook: Penetration rates are becoming high for large home appliances. As a result overall growth should continue to slow, but management sees growth opportunities in lifestyle products e.g. air purifiers and smart home products. However the main growth driver for both top line and bottom line of the business is the ICS division and within that we can expect the growth in the logistic business to drive acceleration in overall growth. The improving product mix within ICS and increasing volume will continue to lead to improving 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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