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 small appliances AC Water heater Washer Fridge TV
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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.
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
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
China Home Appliance Sector 27
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
China Home Appliance Sector 28
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
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.
Share price performance
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
Source: Company data, Thomson Reuters, Credit Suisse estimates
26 October 2016
China Home Appliance Sector 45
Focus charts and tables
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
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
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
Se
p1
3
No
v13
Jan
14
Ma
r14
Ma
y14
Jul1
4
Se
p1
4
No
v14
Jan
15
Ma
r15
Ma
y15
Jul1
5
Se
p1
5
No
v15
Jan
16
Ma
r16
Ma
y16
Jul1
6
Se
p1
6
Mean+2 std
Mean+1 std
Mean
Mean-1 std
Mean-2 std
Mean 8.2
Std 1.6
26 October 2016
China Home Appliance Sector 46
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
China Home Appliance Sector 47
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%
Net debt/equity (%) (163.8) (86.2) (89.1) (91.1) Net debt/EBITDA (x) (5.72) (3.31) (3.03) (3.02)
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.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (Rmb) 36.00
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.
Our Grey Sky Scenario (Rmb) 20.10
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.
Share price performance
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
Source: Company data, Thomson Reuters, Credit Suisse estimates
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).
Blue/Grey Sky Scenario
Our Blue Sky Scenario (Rmb) 14.90
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.
Our Grey Sky Scenario (Rmb) 9.50
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.
Share price performance
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
Source: Company data, Thomson Reuters, Credit Suisse estimates
26 October 2016
China Home Appliance Sector 74
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%
30
40
26
-
5
10
15
20
25
30
35
40
45
2014 Jul 2015 Jul 2016 Jul
mn units
Kitchenware34%
Fridge29%
Washer19%
Dishwasher10%
Others8%
0%
5%
10%
15%
20%
25%
30%
35%
2011 2012 2013 2014 2015 1H16
Gross margin Operating margin Net margin0.0
5.0
10.0
15.0
20.0
25.0
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 10
Std 3.0
26 October 2016
China Home Appliance Sector 75
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
China Home Appliance Sector 76
Figure 164: AC channel inventory has significantly
Net debt/equity (%) (57.4) (57.1) (56.4) (56.2) Net debt/EBITDA (x) (2.66) (3.07) (3.14) (3.23)
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)
Blue/Grey Sky Scenario
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.
Share price performance
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
Source: Company data, Thomson Reuters, Credit Suisse estimates
26 October 2016
China Home Appliance Sector 84
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
Net debt/equity (%) (73.4) (64.7) (64.9) (67.1) Net debt/EBITDA (x) (2.45) (1.93) (1.89) (1.97)
Company Background
Hangzhou Robam is a leading Chinese manufacturer of kitchen appliances, specialising in sterilisers, range hoods, gas stoves, etc.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (Rmb) 58.74
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.
Our Grey Sky Scenario (Rmb) 41.96
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.
Share price performance
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
Source: Company data, Thomson Reuters, Credit Suisse estimates
26 October 2016
China Home Appliance Sector 88
Focus charts and tables
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
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
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%
50.0%
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
Jan15
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
China Home Appliance Sector 89
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
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
China Home Appliance Sector 90
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%
Kitctenware Life smallappliances
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
China Home Appliance Sector 91
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
China Home Appliance Sector 92
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
Source: Company data, Credit Suisse estimates
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
China Home Appliance Sector 93
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)
Source: CMM Source: CMM
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
China Home Appliance Sector 94
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)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
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
China Home Appliance Sector 95
Figure 203: Industry ASPs have been rising steadily
Figure 204: Robam has more than a 40% price
premium over the industry average (1H16)
Source: CMM Source: CMM
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
Gas stove Range hood Sterilizer
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
China Home Appliance Sector 96
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
China Home Appliance Sector 97
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
Source: Company data, Credit Suisse estimates
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
Net debt/equity (%) (34.2) (30.6) (33.4) (37.3) Net debt/EBITDA (x) (1.33) (1.12) (1.24) (1.41)
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.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (Rmb) 25.50
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.
Our Grey Sky Scenario (Rmb) 14.50
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.
Share price performance
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
Source: Company data, Thomson Reuters, Credit Suisse estimates
26 October 2016
China Home Appliance Sector 103
Focus charts and Tables
Figure 218: Joyoung’s revenue breakdown (2015)
Figure 219: IH rice cookers are becoming more
popular
Source: CMM Source: Company data
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%
2014 2015sales volume sales value
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
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 14.5Std 5.1
26 October 2016
China Home Appliance Sector 104
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
China Home Appliance Sector 105
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
Source: CMM Source: Company data
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%
2014 2015sales volume sales value
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
China Home Appliance Sector 106
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.
Shareholding structure
Figure 229: Shareholding structure
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
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
* 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
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China Home Appliance Sector 108
3-Year Price and Rating History for Midea Group Co Ltd (000333.SZ)
000333.SZ Closing Price Target Price
Date (Rmb) (Rmb) Rating
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
* 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 Qingdao Haier Co., Ltd. (600690.SS)
600690.SS Closing Price Target Price
Date (Rmb) (Rmb) Rating
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
* Asterisk signifies initiation or assumption of coverage.
Effective July 3, 2016, NC denotes termination of coverage.
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.
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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.
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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 .
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