20150611-DBS_Group-AIM_HIGHER_11页_372kb

Haier Electronics Summary Report (DBS Group Research, 11 June 2015)

Core Content and Key Highlights

Haier Electronics is a leading Chinese home appliance manufacturer, particularly in washing machines and water heaters. The report recommends a BUY rating with a 12-month price target of HK$28.32, which represents a 31% upside from the last traded price of HK$21.65. The positive outlook is driven by several factors, including the company's strategic expansion into downstream sectors such as 3PL logistics and e-commerce, and its collaboration with Alibaba's Tmall.

Main Points

Strategic Expansion

• Haier has been expanding downstream into logistics, e-commerce, and after-sales services since 2010.
• The 3PL logistics segment is a significant growth driver, with logistics revenue reaching RMB4.9bn in FY14, up 46% from the previous year.
• Strategic cooperation with Alibaba has positioned Haier as a preferred logistics provider for large-sized items, including home appliances and furniture, on Tmall.

E-commerce and Logistics Growth

• The e-commerce logistics segment is expected to see >100% revenue growth in FY15.
• Haier is leveraging its extensive rural store network to support Alibaba's rural e-commerce expansion.
• Haier's logistics revenue in FY14 accounted for >40% of total logistics revenue, a significant jump from 20% in FY13.

Financial Performance

• White goods (washing machines and water heaters) are expected to see high single-digit growth in FY15, with mid single-digit sales growth projected.
• Margin expansion is a key growth driver, with steel and plastics costs declining 25–30% y-o-y in 1H15, contributing to improved gross margins.
• EBITDA is projected to grow significantly, from RMB3,279m in 2014A to RMB5,661m in 2017F.

Valuation

• The target price is based on a 19x 12-month rolling ex-cash PE.
• The P/Book Value (X) is expected to decline from 3.6 in 2014A to 2.0 in 2017F, indicating strong value creation.
• EV/EBITDA is projected to decrease from 9.8 in 2014A to 5.3 in 2017F, reflecting a more favorable valuation as the company grows.

Investment and M&A

• Haier has made significant investments in logistics, including acquiring Fujian Shengfeng Logistics (58% stake) in Jan 2015, expected to bring in c.RMB1bn in logistics revenue and c.RMB50m in net profit for FY15.
• Also acquired Shanghai Grand Logistics (34% stake), expanding into the cold chain logistics segment.
• Plans to invest >RMB2bn in logistics infrastructure and RMB1.2bn in Sinopec Marketing to strengthen its downstream presence.

Dividend and Earnings

• Dividend yield is expected to increase from 0.6% in 2014A to 0.9% in 2017F.
• EPS (HK$) is forecasted to grow from 1.28 in 2014A to 2.08 in 2017F, indicating strong earnings growth.
• Net Profit is expected to rise from RMB2,447m in 2014A to RMB3,997m in 2017F, showing a consistent upward trend.

Key Risks

• Intensifying competition could lead to price wars in the white goods sector, potentially affecting Haier's performance.
• The reliance on Alibaba's Tmall for logistics could pose a risk if the partnership faces challenges or if the e-commerce market experiences volatility.

Critical Data Points

• Gross margin is expected to increase from 14.7% in 2014A to 15.4% in 2017F.
• Operating profit margin is forecasted to rise from 4.5% in 2014A to 5.6% in 2017F.
• Net profit margin is expected to increase from 3.6% in 2014A to 4.3% in 2017F.

Earnings Drivers

• Improving white goods sales momentum due to property pre-sales in China.
• Margin expansion from declining raw material costs.
• Logistics development through strategic partnerships and acquisitions.

Balance Sheet and Liquidity

• Haier maintains a strong net cash position, with >RMB3bn in operating cash inflow annually.
• By the end of the year, the company is expected to have >RMB7.5bn in net cash, supporting capacity upgrades and M&A activities.
• Current ratio and quick ratio remain stable, indicating good short-term liquidity.

Share Price Drivers

• The strategic partnership with Alibaba is expected to drive >100% order growth for the full year of 2015.
• Alibaba's Global Shopping Festival on June 18 is expected to further boost Haier's logistics revenue and visibility.

Smart Home Ecosystem

• Haier has developed the "U+ Smart Home Platform", enabling seamless integration of smart home appliances from various brands.
• The platform is in collaboration with Microsoft, Samsung, Apple, HP, and Huawei, enhancing long-term competitiveness in the smart home market.

Valuation Metrics

• PE (X) is projected to decrease from 17.0 in 2014A to 10.4 in 2017F.
• P/Cash Flow (X) is expected to fall from 14.3 in 2014A to 9.7 in 2017F, indicating improved valuation.
• EV/EBITDA (X) is projected to decline from 9.8 in 2014A to 5.3 in 2017F, showing value creation.

Summary of Ratings and Target Price

• Target Price: HK$28.32 (up from HK$27.78)
• Rating: BUY
• Price Target Justification: Based on 19x 12-month rolling ex-cash PE, reflecting strong growth and valuation.

Analyst Information

• Analyst: Mark LI CFA
• Contact: +852 2971 1935
• Email: mark_li@hk.dbsvickers.com

Disclaimer

• This report is intended for DBS Vickers clients only.
• No liability is accepted for any loss arising from the use of this document.
• The report is based on reliable sources but no guarantees are made regarding accuracy or completeness.