White goods, golden opportunity China: Right time, right place and the right people Disclosures and Disclaimer This report must be read with the disclosures and analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it Consumer Brands & Retail Equities – China June 2015 By Lina Yan and Erwan Rambourg The standard fridges and air conditioners of today will soon become smart appliances in the smart homes of tomorrow It’s a re-rating opportunity – the sector valuation is attractive, the government is pushing industrial innovation, the housing market is perking up and the right management teams are in place We initiate coverage with Buys on Gree (TP RMB77.2), Qingdao Haier (TP RMB35.9) and Midea (TP RMB46.9)
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White goods, golden opportunityChina: Right time, right place and the right people
Disclosures and Disclaimer This report must be read with the disclosures and analystcertifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Consumer Brands & RetailEquities – China
June 2015
By Lina Yan and Erwan Rambourg
The standard fridges and air conditioners of today will soon become smart appliances in the smart homes of tomorrow
It’s a re-rating opportunity – the sector valuation is attractive, the government is pushing industrial innovation, the housing market is perking up and the right management teams are in place
We initiate coverage with Buys on Gree (TP RMB77.2), Qingdao Haier (TP RMB35.9) and Midea (TP RMB46.9)
The days of dull, standardised white goods are numbered. The washing machines, fridges, air conditioners and water heaters of today will soon become the interconnected smart goods in the smart homes of tomorrow. This means wrenching change for many manufacturers in China, but we believe this industry, currently unloved by A-share investors, has great re-rating potential. The government is pushing industrial innovation, the housing market is starting to perk up, production costs are falling, and the price wars should come to an end. The right management teams are in place, too. We initiate coverage of Midea, Gree and Qingdao Haier with Buy ratings.
THIS CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE'S REPUBLIC OF CHINA (THE "PRC") (EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO
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Figure 1. Revenue breakdown by segment (2014)
Source: Company reports
As we explain later, we feel it’s the right time to invest in this unloved sector – the three stocks are
trading at a 75% discount to the average A-share trailing PE. The industry is in the right place because of
sector consolidation, the government’s determination to upgrade the country’s industrial base, and the
desire of customers to have the best available products. Lastly, we believe the right managements are in
place to oversee this transformation.
Time to buy
China’s white goods industry is hard to ignore. Around 40% of the world’s washing machines and
refrigerators are made in China, and it’s as high as 70% for air conditioners This report takes an in-depth
look at the industry and analyses the performance and prospects of the leading listed A-share companies
to help overseas investors understand a sector, which remains unloved by domestic A-share investors
despite the 12-month bull market in China. In our view, this lack of interest is largely because mainland
retail investors, the driving force behind the A-share rally, much prefer “new economy” stocks in sectors
supported by government policies that are designed to modernise the country’s industrial base. We argue
that white goods companies will rerate as they have the best of both worlds – they are in the process of
joining the “new economy club” and also have more traditional virtues, such a high level of consolidation
that is missing from many other industries in China. The top five have a market share of 68% and the top
three 54%. We believe consolidation will continue, allowing the leaders to improve market share, margins
and returns, as consumers gravitate to better products, leading brands and smart appliances.
Midea, Gree and Qingdao Haier should all benefit from the consolidation process. Of the three, Qingdao
Haier and Midea are moving the fastest in the areas of smart appliances and the Internet of Things (IoT),
as reflected in their premium valuation over Gree. However, we think Gree can catch up quickly, largely
because of improvements brought about by the reform of state-owned-enterprises (SOEs), a process
which is well underway.
51%
85%
23%
7%
28%
7%
17%
23%1%
7%
3% 1%
20%
2%
5%
7% 11%
1%
0.5% 2%142 140
89
0
50
100
150
Midea Gree QD Haier
RM
B b
n
Air conditioners Refrigerators Washing machines Small appliancesMotors Logistics/ ICS Others Other product salesIncome from financial services
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White good industry consolidation – leaders dominate all We use data from China Market Monitor (CMM) to analyse the market concentration of the white goods
industry. Overall, the whole industry is highly consolidated, with the top three having a 47-61% market
share, depending on the product, and the top five having a 65-71% market share.
Figure 24. White goods industry concentration by volume (2014)
Source: CMM
1.2% 1.0% 0.7% 0.7%15.5% 14.3% 11.7% 9.8%
58.7% 58.7%57.6% 57.4%
24.7% 25.9% 29.9% 32.1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011 2012 2013 2014
Single Cylinder Double Cylinder Pulsator Roller
24.7% 23.7% 19.9% 19.0%
38.2% 36.5%36.1% 32.3%
21.1% 21.9%23.5%
24.9%
15.9% 17.9% 20.5% 23.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011 2012 2013 2014
below 1500 1500 - 3000 3000-4500 4500 +
24.8% 23.6%17.2%
26.7%
60.6%51.8%
46.9%55.5%
71.7% 68.0% 64.7%68.8%
0%10%20%30%40%50%60%70%80%
Air Conditioner Fridge Heater WasherTop 1 Top 3 Top 5
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Refrigerators
In value terms the market share of the top three fridge manufacturers fell slightly between 2011 and 2014,
from 55.3% to 52.7%; for the top five, it dropped from 72.2% to 71.2%. By volume, the fall was more
apparent – from 54.6% to 51.8% for the top three and from 71.3% to 67.9% for the top five. This reflects
rising competition from smaller companies offering lower priced products, as well as new companies that
entered the market in 2009-11 to take advantage of government subsidies. That said, the industry
consolidation remains at a high level.
Figure 25. Market concentration of refrigerator industry by volume
Figure 26. Market concentration of refrigerator industry by value
Source: CMM Source: CMM
The top three by sales value are Haier, Hisense Kelon and Siemens. The leader, Haier, has almost double
the market share of its nearest rival, Hisense Kelon. Figure 27 shows that Haier lost market share over
2011-14; however, this might be due to bias in CMM data. CMM focuses on third-party rather than
manufacturers’ internal channels. During this period Haier shifted more sales to its internal channels (70%
of its total sales in 2014) and this may explain the decline in market share.
Figure 27. Top 5 refrigerator manufactures’ market share by value (2011-14)
Source: CMM
Air conditioners
The market concentration by volume has grown steadily between 2011 and 2014 – the top three have
gone from 69% to 72% and the top five from 57% to 61%. In value terms, the top three have gone from
59% to 65% and the top five from 70% to 75%.
24.1%
51.5%
71.5%
28.1%
54.6%
71.0%
25.2%
52.8%
69.5%
23.6%
51.8%
68.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Top 1 Top 3 Top 5
2011 2012 2013 2014
26.7%
51.4%
70.2%
29.9%
55.3%
72.2%
27.1%
54.3%
72.6%
26.0%
52.7%
71.2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Top 1 Top 3 Top 5
2011 2012 2013 2014
26.7
%
11.0
%
13.3
%
9.9%
8.6%
29.9
%
13.0
%
12.4
%
6.9% 7.7%
27.1
%
14.5
%
12.5
%
7.7%
7.9%
26.0
%
14.1
%
12.6
%
8.8%
7.5%
0%
5%
10%
15%
20%
25%
30%
35%
Haier Hisense Kelon series(Rongsheng)
Siemens Midea series Meiling
2011 2012 2013 2014
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Figure 28. Market concentration of air conditioner industry by volume
Figure 29. Market concentration of air conditioner industry by value
Source: CMM Source: CMM
The top three are Gree, Midea and Haier, with Gree and Midea having more than a 52% market share
between them. Figure 30 shows that between 2012 and 2014, Gree maintain its lead with a 28% share by
value. Midea rose from 20% in 2012 to 25% in 2014 as a result of restructuring its sales channels. Haier’s
market share is shown to be stable at 13%; however, again, this could be due to bias in CMM data.
Haier’s air conditioner sales rose at an 18% of CAGR in 2011-14, outpacing the industry average.
Figure 30. Top 5 air conditioner manufactures’ market share by value (2011-14)
Source: CMM
Washing machines
The market concentration by value declined in 2011-14 – from 60% to 59% for the top three and from
78% to 74% for the top five. It was a similar story by volume (see table), largely because Haier’s market
share fell (see Figure 33). Over this period Haier’s washing machine sales increased at a CAGR of 7.7%,
in line with the industry growth, so we think CMM’s methodology explains the apparent contradiction.
Figure 31. Market concentration of washing machine industry, by volume
Figure 32. Market concentration of washing machine industry, by value
Source: CMM Source: CMM
23.9%
57.4%
69.0%
25.8%
59.1%
70.3%
25.3%
58.9%
69.5%
24.8%
60.6%
71.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Top 1 Top 3 Top 5
2011 2012 2013 2014
26.1%
59.2%
69.9%
28.8%
61.6%
71.7%
28.3%
62.8%
73.0%
28.0%
64.9%
74.9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Top 1 Top 3 Top 5
2011 2012 2013 2014
26.1
%
22.5
%
10.7
%
5.2%
5.0%
28.8
%
19.7
%
13.0
%
4.8%
4.4%
28.3
%
21.6
%
12.9
%
4.5%
4.0%
28.0
%
24.7
%
12.3
%
4.0%
4.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Gree Midea Haier Mitsubishi Electric Oaks
2011 2012 2013 2014
27.0%
60.8%
75.0%
31.2%
59.8%
73.2%
27.9%
56.9%
70.4%
26.7%
55.5%
68.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Top 1 Top 3 Top 5
2011 2012 2013 2014
26.3%
57.9%
78.2%
29.9%
59.3%
77.9%
26.8%
56.7%
74.8%
26.2%
58.5%
73.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Top 1 Top 3 Top 5
2011 2012 2013 2014
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By sales value, the top three are Haier, Midea and Siemens. Haier, the leader, has roughly double the
market share of Siemens, the No 3. Figure 33 shows that between 2012 and 2014, Siemens has
consistently picked up market share and other foreign brands, like Panasonic and Sanyo, have lost share.
Figure 33. Top 5 washing machine manufactures’ market shares by value (2011-14)
Source: CMM
Water heaters
As shown in the tables, the market share of the leading companies is steadily increasing in both volume
and value. With the top three having more than 50% of the market, competition in the water heater
industry remains benign.
Figure 34. Market concentration of water heater industry, by volume
Figure 35. Market concentration of water heater industry, by value
Source: CMM Source: CMM
By sales, the top three are AO Smith, a US company, Haier and Midea. The leader, AO Smith, has more
than double the market share of the No 3. Figure 36 shows that between 2012 and 2014, Midea regained
market share through channel restructuring. Although CMM data show Haier losing market share, in
2011-14 its water heater sales rose at a 17% CAGR, outpacing the industry.
26.3
%
20.4
%
11.2
%
11.2
%
9.1%
29.9
%
17.2
%
12.1
%
9.8%
8.8%
26.8
%
16.7
%
13.2
%
8.9% 9.2%
26.2
%
18.4
%
13.8
%
7.9%
7.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Haier Midea Siemens Panasonic Sanyo
2011 2012 2013 2014
19.9%
45.9%
63.6%
18.2%
45.3%
63.6%
17.2%
46.9%
64.7%
0%
10%
20%
30%
40%
50%
60%
70%
Top 1 Top 3 Top 5
2012 2013 2014
18.2%
49.9%
64.2%
16.9%
50.3%
65.2%
15.3%
51.1%
65.7%
0%
10%
20%
30%
40%
50%
60%
70%
Top 1 Top 3 Top 5
2012 2013 2014
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Figure 36. Top 5 water heater manufactures’ market share, by value (2011-14)
Source: CMM
Government polices
Since 2008, the government had used various subsidy programmes to boost domestic consumption. As a
result, the white goods industry recorded strong growth in 2009-11. Growth was negative in 2012 after
the subsidies ended, and then recovered in 2013 due to a new subsidy on energy-efficient appliances and
the recovery in the housing market. The energy-efficient subsidy expired in June 2013.
Plan to encourage upgrades
In January 2015, the country’s main planning agency, the National Development and Reform
Commission (NDRC), announced a plan to encourage China’s industry to be more environmentally
friendly and energy efficient. For white goods, this should boost sales of air conditioners, refrigerators,
and washing machines that meet the highest level of energy efficiency, known as level one. Details of this
latest subsidy are not available yet; however, energy grade 1 products account for about 5% of total
appliance sales (including categories like flat screen TVs). We think this “industry leader” programme
will drive further industry consolidation as the energy grade 1 products are dominated by market leaders.
24.1
%
18.2
%
7.6%
7.5%
6.8%
25.0
%
16.9
%
8.5%
7.8%
7.0%
24.9
%
15.3
%
10.8
%
7.4%
7.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
A.O. Smith Haier Midea Wangjiale Wanhe
2012 2013 2014
Figure 37. Government subsidies for the home appliance industry
Exchange old for new subsidy programme
Implementation period -Initial trial period starting 1 June 2009 to 31 May 2010
-Extended to the whole country from June 2010 to expire 31 December 2011 Trial cities/provinces Cities (5x): Beijing, Shanghai, Tianjin, Changsha, Fuzhou; Provinces (4x): Guangdong, Shandong, Zhejiang, Jiangsu Go Rural Implementation period -Initial trial period starting December 2007 to December 2008 in three provinces
-Extended from 3 to 12 provinces from December 2008 for a period of four years -It later was extended to the whole country from February 2009 -Expired in November 2011 for the first three trial provinces; November 2012 for the second batch nine trial provinces; February 2013 for the rest of the country
Trial cities/provinces First batch trial provinces/cities (3x) Shandong, Henan, Sichuan; second batch trial (9x) in Inner Mongolia, Liaoning, Heilongjiang, Anhui, Hubei, Hunan, Guangxi, Chongqing, Shanxi
Energy saving subsidy Implementation period -Started in June 2009 to expired in June 2011
-Adjusted in June 2010 by an increase in the energy saving threshold and reducing the subsidy Phase II Energy saving flat-panel TV and air conditioner subsidy Implementation period -The policy will last from 1 June 2012 to 31 May 2013 to give subsidies on energy saving flat panel TVs and air conditioners
Source: HSBC collected from the NDRC website
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Conclusion
The white goods industry in China has past the fast growth stage and the market is highly consolidated.
Over 2014-17, based on our assumptions on ASPs and volume growth, we forecast that domestic sales
will increase at a CAGR of 7.3% for washing machines, 6.1% for refrigerators, 8.4% for air conditioners
and 7.2% for water heaters.
As the market is so concentrated, we expect the margins and ROIC of the leading manufacturers to
continue to improve. Haier’s net margin should rise from 5.6% in 2014 to 6.7% in 2017e, Midea’s from
10.1% to 12.2%, and Gree’s from 8.4% to 8.9%.
As the industry matures, the focus will increasingly turn from quantity to quality, giving companies with
strong R&D a significant advantage. As profitability becomes a higher priority than scale, margins should
improve through efficiency gains and product upgrades. We expect occasional price wars to strengthen
the leaders’ market share and help clear out channel inventories. At the same time, the industry
consolidation will continue as the dominant companies strengthen their distribution channels in lower tier
cities and rural areas, while benefitting from energy-efficient programmes and ever-more aspirational
consumers seeking the best products.
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In this chapter we look at the outlook for 2015 by assessing cyclical factors, such as air conditioner price
wars, raw material prices and the property cycle.
2015: raw material price benefits outweigh weak demand
Air conditioner price wars
The distribution of air conditioners is different to other types of white goods. Each August, distributors
make pre-payments for the inventory they are ordering, a lead time of about 12 months. In May, they
have a chance to replenish their orders right before the peak season. If market conditions change, the
industry can experience destocking and restocking cycles due to the mismatch between actual sales
and pre-orders.
In 2014, inventories piled up due to a sluggish property market and a cold summer. According to the
“2015 China Air Conditioner Industry White Paper” by CMM, inventory reached more than 40m units by
the end of 2014, equivalent to one year of sales volume at the retail level.
We do not have the data to track the inventory level at a retail level, so we use the inventory-to-sales ratio at
the manufacturers’ factories. This ratio went up to 1.12x in 4Q14 from an average of 0.73x in 9M14 and
0.72x in 2013. With working capital tight because of slower-than-expected retail sales, distributors did not
buy from factories in quantities based on their pre-orders, causing inventories at the factory level to rise too.
To clear stock, Gree started a price war in September 2014 and peers, such as Midea and Haier, followed;
another price war by major air conditioners makers followed in March. According to Ao Wei
Consultancy, the ASP declined by 9% y-o-y during the latest price war. To protect the health of the whole
industry, the government intervened. On 30 April, the NDRC called for a meeting with the major
manufacturer and distributors to ask them to avoid excessive price wars and stabilise prices in the coming
peak sales season.
Cyclical rebound in 2H15
Declining raw material prices are a major tailwind; the benefits for
air conditioner makers will come more in 2H15 after the price war
Competition for refrigerators and washing machines remains
benign; the benefit of lower raw material prices to flow to the
bottom line
We expect industry growth to recover from 4Q15, led by the pick-
up in the property cycle
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So, despite a difficult start to 2015, we expect to see the following:
As the industry margin bottomed out in 1Q15, the downward pressure on the ASP is falling prior to
the peak summer season; the benefit from declining raw material prices will start to flow through.
The usual order replenishment prior to the peak season in May will be limited due to the inventory issue.
Manufacturers’ sell-in volumes will start to improve from 3Q15 from the recovery in housing market
and improving inventories, especially if there is a hot summer.
Market consolidation will increase after the price war.
Figure 38. Air conditioner inventory at manufacturers (’0000 units)
Source: IOL
Raw material prices
The materials most commonly used to make white goods are steel, aluminium, copper and plastics. Price
fluctuations, which are driven by international supply and demand, have a large impact on gross profit
margin (GPM), as retail prices are usually stable. Raw materials account for about 80% of the cost of
goods sold (COGS), and the appliances have a GPM of 25-35%. Assuming there is no change in product
prices, every 10% drop in raw material prices leads to a 5-6ppt improvement in GPM. As Figure 39
shows, YTD the blended average cost for making refrigerators, air conditioners, washing machines and
water heaters has declined by 10%, 8%, 7% and 8%, respectively.
0
200
400
600
800
1000
1200
1400
0.0
0.5
1.0
1.5
2.0
2.5
Jan-
10
Apr
-10
Jul-1
0
Oct
-10
Jan-
11
Apr
-11
Jul-1
1
Oct
-11
Jan-
12
Apr
-12
Jul-1
2
Oct
-12
Jan-
13
Apr
-13
Jul-1
3
Oct
-13
Jan-
14
Apr
-14
Jul-1
4
Oct
-14
'0000 units
Inventory at manufacturers (rhs) Inventory to sales ratio
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Figure 39. Raw material composition by products and the price y-o-y % changes
New trends and company strategies, including exports, smart
appliances, online, smart factories and incentives
Qingdao Haier leads in smart appliances, followed by Midea; Gree
has ground to make up
Automation the potential game-changer
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China are switching from OEM to exporting their own brands and the original design model (ODM). In
Figure 51, we compare the export strategies of Midea, Qingdao Haier and Gree.
Figure 51. Comparison of white goods makers’ export strategies
Company Strategies Details % of export under its own brands/ODM
Qingdao Haier
Own brand/ODM only
First stage: focus on its own brand only and developed markets, like Europe, the US and Japan in export
Second stage: target to acquire second tier international brands to expand market share
Haier does not do OEM exports and its Haier brand is the number one brand globally for washing machines with a 14.4% share by volume
It started to develop its high end products’ global share under its own Casarte brand, and acquired brands, like Sanyo and Fisher & Paykel;
Globally, Haier has 21 industry parks, 24 manufacturing factories, 10 R&D centres and 19 overseas trading companies.
100%
Midea Try to increase the share of own brand/ODM
First stage: export mainly under OEM to grow its share in the export market
Second stage: invest in international brands and form strategic alliances overseas
Third stage: target to export under its own brand or ODM under its own control
Global production: in 2007, Midea started its first overseas production base in Vietnam
Global sales & distribution: 1) 2008: Midea and Carrier set up a JV to develop overseas markets; 2) 2010: acquired a 32.5% stake in Carrier's business in Egypt and Morocco; 3) 2011: acquired 50% stake in Carrier's businesses in Latin American countries of Brazil, Argentina and Chile; 4) 2012: Midea set up a JV in India with Carrier and holds a 60% stake
Tie-up with Bosch in the European market: on 31 March 2015, Midea signed a JV contract with Bosch to manufacture VRF central air conditioning systems in Hefei and export these to Europe
More than 60% of export sales under its own Midea brand or ODM in 2014 (38% under Midea own brands; 22% under ODM)
Gree Try to increase the share of own brand/ODM
First stage: export under OEM model to gain market share and focus on emerging markets
Second stage: export more under ODM and its own brand and focus on developed markets
Global production: Gree started its first overseas production in Brazil in 2001
Global sales & distribution: Gree set up its US sales office in 2012
In 2014, Gree has a 20% market share by volume in the air conditioner export market, based on IOL data
50% in 2014, up from 30% in 2012 of export volume is under its own brands (exports under its own brands to 100 countries and regions globally)
Source: Company disclosures, HSBC
Conclusion
Qingdao Hair and Midea have the highest proportion of export sales either through their own brand or the
ODM model. This gives the companies better control over their sales overseas, disregarding fluctuations
in exchanges rates, economic cycles overseas and tariff changes.
Smart appliances
White good makers in China are developing smart appliances and smart systems to connect directly with
consumers and complete the digitalisation process that links research, production and sales. Smart
appliances will be the main driver of the replacement cycle of appliances by stimulating upgrade demand.
Definitions differ, but smart appliances generally refer to products that use computer systems and
communications technology to make functions faster, cheaper, more energy efficient and more convenient.
Appliances that are connected to the internet via Wi-Fi and can be controlled remotely from a computer
or mobile device are already widely available in many markets. A step further is smart grid technology:
This involves smart appliances accessing a smart grid power source to optimise energy use. For example,
power will only be supplied to a coffee maker in the morning and the washing machine at night.
Eventually, we believe refrigerators, toasters, dishwashers and washing machines will all be linked to the
smart grid network. Smart grid technology is already widely used in Germany.
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We think white goods leaders have natural advantages when it comes to developing new ecosystems for
smart appliances, part of the Internet of Things (IoT). For example, they can choose whether to develop
their own smart platforms or work with major online companies. Gree, Midea and Haier all have an
annual domestic sales volume of around 30m units. This gives them a significant head start in terms of
customer reach, especially for smart appliances.
Figure 52. Annual domestic sales volume (m, 2014)
Gree Midea Haier
Air conditioners 30.3 16.8 6.8 Refrigerators 8.0 15.1 Washing machines 4.7 12.9 Total 30.3 29.4 34.9
Source: HSBC estimates
c
Strategies in China
We review the smart appliances strategies of Qingdao Haier, Midea and Gree, as well as those of pure
internet companies like Xiaomi and JD.com.
Qingdao Haier
In 2014, Qingdao Haier started commercial sales of internet/smart appliances. It sold 1m units of smart
refrigerators, washing, air conditioners and water heaters, generating RMB3bn of sales under its U-home
smart appliance system. In 1Q15 alone the company sold half a million smart appliances.
Qingdao Haier has a two-pronged approach. One is developing its own smart products – at the end of last
year the company had 25 categories. The other is to attract more suppliers and users to form its own smart
ecosystem – it has the most open smart appliance platforms that are available to third-party brands and
industry partners via its 7 Smart Life Ecosystem, part of the company’s U+ Platform.
The plan is to open the U+ Platform to more appliance brands, product categories and services providers
to provide consumers with a “safe, convenient, comfortable and pleasing” lifestyle anytime and anywhere.
The goal is total connectivity between devices through communications, internet, TV broadcasting, and
power grid networks at a family, community and global level. The elements that make up this connected
world include U+Smart family, U+Cloud, U+Big data, U+APP and U+Cloud.
We believe Qingdao Haier is leading the way in China in the area of open smart systems. By the end of
last year it had attracted nearly 100 partners and, significantly, Qingdao Haier was among the first home
appliance makers globally to partner with Apple’s smart home platform.
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Figure 53. Qingdao Haier’s smart appliances, modules and partners
Key modules Strategic partners
Smart Air Ecosystem Use air conditioners, air boxes, air rubic cubes, mini-air conditioners, purifiers as the hardware terminals and “Haier Good Air” “Air Box” and ”Air Steward” APPs as the user terminals to provide users with value-added services to improve air quality
Apple: Joined Apple’s HomeKit smart appliance platform in March2015
Smart Food Ecosystem Use smart refrigerators as the hardware terminals and “Haier Fridge” “Weizhidao Gourmet” and “U-Cellar+” APPs as the user terminals to provide users with value-added services to improve food quality
Smart refrigerator products include Smart Window series, Smart Control Four-door series, and Casarte Smart series
Smart Wash Ecosystem Based on its database on clothes, water quality, detergent and customer washing habits, through smart washing machines to build an open platform for perfect washing solutions. Smart washing machines provide automatic cloth detection, automatic washing programme selection, and automatic release of detergents
Data connectivity: Benlaishenghuo Net, COFCO, HNA Group, Yihaodian, BAIDU, Sino Ocean Land, Meishi Tianxia, Baixianji, ROHM, 3M,Excegroup, Wanda Group
The platform is open to apparel brands, detergent brandsSmart Safety Ecosystem It aims to provide users with functions, such as personal safety
(emergency alarm, fall alarm, missing alarm, abnormal sleep alarm, abnormal health alarm, hijack alarm) and family safety (fire, water, electricity and gas alarm) and community safety and monitoring
Smart Health Ecosystem Use U+ Health Cloud to provide functions sports, diet, health,environment, chronic disease management functions
Smart Entertainment Ecosystem
Co-operate with Alibaba on smart TV Content connectivity: Xiami Music, Bosheng, Orvibo, Iqiyi, Alibaba, Realtek, Optoma, Huawei, Tianqian kalaok Smart Water Ecosystem Integrate water heaters, fans, water purifiers, water heaters based
on “Haier Smart Washer”, “Haier Heat Control” “Smart Heater” APPs to realise real-time data interaction and automatic monitoring of water heaters
Source: Company reports
Midea
Midea has a different approach to smart appliances than Qingdao Haier. Rather than starting with
developing an open system, Midea has chosen to develop individual smart appliances. The idea is that, at
a later stage, it can either develop an integrated smart home system or connect its smart appliances to
other platforms or networks. In March 2014, Midea published its M-Smart report, highlighting 25
categories of smart appliances. The aim is to have more than 50% of air conditioner sales classified as
“smart” by 2018.
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Figure 54. Midea’s smart appliances, modules and partners
Key modules Strategic partner
Air smart housekeeper
Midea's air conditioners, air purifiers, humidifiers and dehumidifiers to provide “one-stop” air quality solutions on air temperature, humidity, cleanness, etc.
Xiaomi: In December 2014, Midea offered 55m new shares at RMB23.01 to Xiaomi. Xiaomi will have a 1.288% stake in Midea and it has also signed a strategic agreement to co-operate in the smart home value chain and e-commerce
Smart air conditioners have functions like voice control, sleep mode, remote control, electricity usage management, and information alerts
Nutrient smart housekeeper
It provides integrated control of all kitchen appliances through its cloud platform using Wi-Fi and IGRS protocols
Apple: On 18 March 2015, Midea joined Apple’s HomeKit smart home platform Smart small appliances with functions like auto detection, auto alerts;
smart microwaves with auto cooking based on QR code scanning, remote control, smart menu downloads
Water smart house keeper
Smart washing machines with functions to auto detect load and decide the volume of detergent
Alibaba: On 3 April 2015, Midea signed an agreement with Alibaba to co-operate in marketing, system connectivity, smart appliances, supply chain warehousing, product customisation
Safety smart house keeper
Smart range tops with auto gas leakage alerts, auto switch-off, kid lock, timed cooking, firewall
SIIX: On 3 April 2015, Midea signed a JV agreement with SIIX EMS to jointly develop smart switch controls
Midea’s smart appliance products and strategic partners are shown in Figure 54. Midea’s plan is to
provide integrated smart home solutions that cover air quality, nutrient, water quality and safety. The
strategy is to: 1) start by developing individual smart appliance products; and 2) through remote control,
big data and sensor technology, produce appliances that are intelligent, healthy and energy efficient under
three matrixes – One Housekeeper, One Community and One Centre. One Housekeeper released 25
categories of smart appliances in 2014; One Community has built up a 10m consumer strong Media
Consumer Society and will improve marketing through social media; One Centre upgrade all smart
appliances through M-BOX.
At a later stage, Midea will start to build its own ecosystem and integrated solutions based on its cloud
platform, APP development and Wi-Fi modules. In 2015, it plans to increase the number of smart product
categories to 30 and develop B2B business under Smart Hotels.
Gree
Gree has a distinctive strategy, probably because it focuses on a single product: air conditioners. Gree
focuses on developing a smart power management solution that allows a family to transmit surplus
electricity generated by Gree photovoltaic air conditioners to the city grid. The device also allows
customers to monitor energy use to choose the most economical option. Gree’s smart strategies are based
on one control platform, a smart power management centre and big data.
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Figure 55. Gree’s smart appliances, modules
Smart power system Based on multi-line photovoltaics air conditioner system, a family can have its own electricity supply and can also transmit surplus electricity to the city grid. The device also allows each family to monitor the energy generation/usage status anytime to choose the most economical power usage solutions
Smart air conditioners Use air conditioners as the central hubs/power source to connect to other appliancesSmart phones Gree will launch its own smart phones in 2015 as the user terminals for using its smart appliancesOther smart devices Water heaters, water purifiers, smart remote control terminals
Source: Company reports
Pure internet companies: Xiaomi and JD.com
We also examine the smart appliance strategies of pure internet companies. Domestic smartphone giant
Xiaomi and online retailer JD.com (JD US, Not Rated) are the two most active in developing the Internet
of Things/appliances through their own smart ecosystems.
Xiaomi
A pure internet-based smart phone manufacture in China under the brand “Xiaomi”: as Xiaomi does not
manufacture appliances, its general principal is to create an open smart ecosystem to attract more users,
suppliers, services and third-party technologies, and to co-operate with other manufacturers to develop the
hardware. Xiaomi’s strategies are:
To use the Xiaomi smartphone as a control centre to connect with Xiaomi Cloud, the MIUI system
and app through Xiaomi’s low-cost smart module.
To connect its smart phone users with the smart appliance users to interact with them on multiple
hardware interfaces.
Figure 56. Xiaomi smart modules
Key modules Strategic partner
Universal Smart Module Based on Wi-Fi/Communication Protocol with Xiaomi Cloud, upgrade traditional devices to smart appliances
Midea: offered 55m common shares at RMB23.01 per share to Xiaomi. Xiaomi will have own 1.29% of the common shares of Midea after the transaction. The two parties also formed a strategic cooperation alliance to develop smart home systems and e-commerce
Xiaomi Smart Home App
Connect devices so that every family member can control all appliances. Also, connect devices with e-commerce and apps so that the customer can place orders easily. Deeply integrated with the MIUI system so the users can connect/control every device with just one click
Universal Smart Hardware Cloud Provide network and cloud services to manufacturers to enable them to store, calculate, and access their user data
Source: Company announcements
JD.com
In March 2015, JD.com announced it was developing a Smart Home Combo Kit with Broadlink. In the
same month it also established a JV with IFLY TECK (002230 CH, Not Rated) to cooperate on smart
home business and speech recognition. It wants to build a network of appliances that can control devices
automatically and conveniently. The company develops its own smart chips so appliances can be
upgraded to smart devices. The smart chips are based on Wi-Fi chip technology, mobile connection and
virtual networking.
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Figure 57. JD.com smart modules
Key modules Strategic Partner
Smart Home Combo Kit Kitchen, bedroom, dining appliances
JD App All the products can be controlled through the JD app; connects 300 kinds of devices and will reach 1,000 soon
Source: Company announcements
E-commerce strategies
The shift from offline to online is accelerating. Qingdao Haier, Gree, and Midea are adapting their
business models to the new dynamics in consumer behaviour by flattening the organisational structure,
digitalising their channels and investing in smart factories.
Figure 58. Y-o-Y Value Growth Figure 59. Y-o-Y Volume Growth
Source: MIIT Source: MIIT
In 2014, online consumer electronics (CE) sales grew 51% y-o-y to RMB201bn. The contribution to
online CE sales from large appliances grew to 30% of the total in 2H14, up from 26% in 1H13. Online
sales of large appliances, small appliances and mobile handsets grew 72%, 78% and 40% y-o-y,
respectively, in 2014. By category, online sales of water heaters, washing machines, refrigerators, air
conditioners and flat panel TVs grew 170%, 170%, 75%, 67% and 64%, respectively, last year.
By value, online consumer electronics purchases now represent 13% of total sales. The online volume
penetration of flat panel TVs, washing machines, refrigerators, air conditioners and water heaters reached
21%, 14%, 13%, 11% and 10%, respectively, in 2H14.
64% 67% 75%
170% 170%
80%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Flat panelTV
Air con Fridge Washer Waterheater
Air puriferYoy % 2014/2013
67% 70% 74%85%
166%
78%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Flat panelTV
Air con Fridge Washer Waterheater
AirpurifierYoy % 2014/2013
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Online scale
We compare the three companies in terms of online scale, categories and strategies. In Figure 63, we
compare the online contribution to their respective domestic large and small appliances sales by adjusting
the retail online Gross Merchandise Volume (GMV) to ex-factory revenue. This shows that in 2014
online accounted for 11% of Qingdao Haier and Midea’s sales but only 1% of Gree’s sales.
In Figure 62, we compare the three’s market shares by category. Qinghao Haier and Midea had roughly
the same market share of 10% for online large appliance sales. Qingdao Haier and Midea’s market share
in small appliances, including water heaters, was 5% and 13%, respectively.
The market concentration for large appliances is much lower online than offline. The top three’s market
share is above 50%, but they only have 21% of online large appliance sales. As online will continue to
outpace offline, we believe they need to ramp up their online channels.
Online strategies
White goods makers adopt different online strategies. The common theme is to evolve their
production/distribution to a consumer-driven model (Consumer-to-Business) from the existing wholesale-
driven model (Business-to-Business) by flattening the organisational structure, digitalising their channels
and investing in smart factories.
Midea Group
In 2008, Midea opened its flagship Tmall store. By 2014, the company achieved online retail GMV of
RMB10bn, up from only RMB716m in 2009. It also set up its own e-commerce company in 1H14.
Midea’s online strategies include:
Figure 60. Breakdown of online CE sales by value (1H13) Figure 61. Breakdown of online CE sales by value (2H14)
Source: MIIT Source: MIIT
Figure 62. Online sales by categories (2014)
Qingdao Haier Midea Gree Market
Retail GMV (RMBm) Large appliances 5,540 6,000 1,000 59,100 Small appliances 1,562 4,000 - 31,000 Total 7,102 10,000 1,000 201,100 Market share by value (%) Total 3 Large appliances 9.4% 10.2% 1.7% 21.2% Small appliances 5.0% 12.9% 0.0% 17.9% Total 3.5% 5.0% 0.5% 9.0%
Source: MIIT, Company data, HSBC estimates
- Big appliances
26%
- Small appliances
17%
- Mobile handsets
57%
- Big appliances
30%
- Small appliances
12%
- Mobile handsets
58%
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E-commerce and logistics platforms: Midea’s online sales are managed and fulfilled by its distributors.
In the future it wants to aggregate all online sales, product and inventory information under its own e-
commerce company, and use one online platform to sell to other online channels. It also wants to further
internalise last-mile logistics to its own logistics platform, Annto. Starting from the end of June 2015, it
plans to use Annto to fulfil all large appliance orders on Tmall by the end of the year.
Digitalisation: It aims to link its customer, products, and suppliers in one system, and to be able to
manage the whole goods flow, finance flow and information flow real-time on one mobile device.
Connecting with customer: It wants to establish direct connections with retail customers by starting
its own vertical website: www.midea.com and online-to-offline (O2O) flagship stores. The O2O
stores are positioned as one-stop customer service centres by integrating retailing, after services and
member services. Midea had 1,900 flagship stores at end-2014 and plans to increase this to 3,000-
4,000 by 2016.
Qingdao Haier
Qingdao Haier was an early mover to the online channel. It started e-commerce in 2012 through its own
e-commerce company and it also provides consumers with customised appliances under the “Leader”
brand online. In 2014, its online sales reached 8% of the total revenue and 11% of domestic appliance
sales after growing 150% y-o-y. This includes sales from its vertical e-commerce website: ehaier.com and
sales from JD.com, Tmall, Egou under Suning and Gome.
Haier has already integrated its internal distribution and logistics sources under one platform that is open to
third parties. As of 2014, third-party integrated channel services (ICS) accounts for 19% of Qingdao Haier’s
total revenue. Meanwhile, Haier wants to transform its distribution network into an O2O service platform.
Gree
Air conditioners require specialised installation and after-sales services, so online penetration is the
lowest among large appliances, at only 11%. Gree was slower than the other two to move online. In 2014,
Gree joined Tmall’s “11.11” promotion for the first time and recorded RMB140m sales. Later, it
announced an O2O cooperation with Alibaba to connect its 20,000 speciality stores to Alibaba’s online
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Figure 65. Qingdao Haier option plans
First Second Third Fourth
Announcement date 5/1/2009 9/1/2010 5/1/2012 4/12/2014 Option issue date 10/28/2009 2/9/2011 6/27/2012 2/26/2015No of participants 49 68 200 454 No of shares (m) 35 22 26 54 (47.6m options, 6.9m
restricted shares) As % of total shares 2.6% 1.6% 1.0% 1.8% Options exercise price (RMB) 5.24 10.11 10.36 16.63 Restricted share price (RMB) NA NA NA 7.73 Vesting periods 2010 (10%), 2011 (20%), 2012
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Growth
In Figure 71, we compare the revenue growth in 2011-14. Qingdao Haier’s revenue growth was the
smoothest thanks to its diversified product portfolio and its direct control of distribution channels, which
reduced the volatility from inventory cycles.
Figure 71. Sales y-o-y % growth
Source: Company reports (* the 2014 revenue growth for Qingdao Haier has been adjusted based on a reduction in connected transactions between the parent and the listco)
Midea’s sales dropped sharply in 2012 due to overexpansion and an inventory build-up in 2009-11. After
it scaled back growth started to recover and in 2014, revenue from its main business was RMB131bn,
close to that of RMB132bn in 2011.
Gree’s sales have outperformed the other two thanks to market share gains in air conditioner sales. It was
able to gain share by maximising the leveraging of its distributors’ working capital under the “higher
GPM, higher selling expenses” model. Sales by product
Figure 72. Revenue breakdown by segments (2014)
Source: Company reports
21.6%
-23.4%
18.1%
17.4%
37.3%
19.9% 19.9%
16.6%
28.2%
11.3% 11.0% * 6.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
2011 2012 2013 2014
Midea Gree QD Haier
51%
85%
23%
7%
28%
7%
17%
23%1%
7%
3% 1%
20%
2%
5%
7% 11%
1%
0.5% 2%142 140
89
0
50
100
150
Midea Gree QD Haier
RM
B b
n
Air conditioners Refrigerators Washing machines Small appliancesMotors Logistics/ ICS Others Other product salesIncome from financial services
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In 2014, Midea’s net revenue was RMB142.3bn, similar to that of Gree (RMB140bn). Qingdao Haier
revenue totalled RMB88.8bn in the same period (Qingdao Group will inject all appliance-related business
into Qingdao Haier by January 2016, according to an announcement made in January 2011).
Qingdao Haier has the most diversified revenue stream. Integrated Channel Services (ICS), that provide
distribution and logistics services to third parties, accounted for 19.6% of revenue in 2014. Apart from ICS,
equipment parts accounted for another 4.9%. These sales were mostly connected transactions with its
parent company, and the number has fallen from 9% in 2012 in line with a commitment made by the parent
in 2011. Qingdao Haier also has the most diversified portfolio of large appliances, with air conditioners,
washing machines and refrigerator accounting for 23%, 17% and 28% of its revenue in 2014, respectively;
small appliances, including kitchen appliances and water heaters accounted for about 7%.
Air conditioner sales account for 85% of Gree’s total revenue, with the balance coming from small
appliances and industry products under the TOSOT brand.
Midea has the most diversified product portfolio. Large and small appliances accounted for 65% and 23%
of revenue, respectively, with the rest coming from motor and other product sales. For large appliances,
air conditioners, washing machines and refrigerator sales accounted for 51%, 7%, and 7% of
revenue, respectively.
Figure 75. 2014 sales value of refrigerators of the companies Figure 76. 2014 sales value of washing machine of the companies
Source: Company data Source: Company data
10
25
0
5
10
15
20
25
30
Midea Gree QD Haier
RM
B bn
Refrigerators
10
15
0
2
4
6
8
10
12
14
16
18
Midea Gree QD Haier
RM
B bn
Washing machines
Figure 73. 2014 sales value of air conditioners Figure 74. 2014 sales value of small appliances
Source: Company data Source: Company data
72.7
118.7
20.0
0
20
40
60
80
100
120
140
Midea Gree QD Haier
RM
B bn
Air conditioners
32.7
1.8
6.4
0
5
10
15
20
25
30
35
Midea Gree QD HaierR
MB
bnSmall appliances
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Sales by region
Midea has the highest revenue from international markets (38%), while export sales accounted for 11.3%
and 12.1% of Gree’s sales and Qingdao Haier’s sales, respectively.
Figure 77. Sales breakdown of main business by regions (2014)
Source: Company Reports
Margins
In Figure 78-85, we compare the gross margins, contribution margins, operating expense ratios, operating
margin and net margins.
GPM
As explained earlier, Gree’s higher GPM is linked to its high selling and marketing costs. A better
comparison is the contribution margin, which is GPM minus the selling expense ratio.
We conduct our cash flow forecasts based on working capital forecasts, capex forecasts, and dividend
payout.
Our working capital forecasts assumptions are listed in Figure 106. Midea reported 16 working capital
days in 2014 and we forecast this to steadily increase to 34 days by 2017 by assuming stable inventory
days but slower working capital cycles. Figure 106: Working capital
2013a 2014a 2015e 2016e 2017e
Inventory Turnover Days 59.8 51.9 54.1 54.1 54.1 Raw material 14.3 10.8 10.8 10.8 10.8
Trade + Bills Receivable Days 66.5 67.9 66.9 66.9 66.9 Trade + Bills+ Deferred rev Payable Days 113.3 127.0 121.8 118.2 113.3 Working Capital Days (Working Capital*365/ COGs) 33.3 16.2 24.4 28.5 33.9
Source: Company data, HSBC estimates
We forecast RMB4bn of capex annually from 2015 to 2017. In 2015, the company guided total capex of
RMB3,600m, with: 1) only RMB800m investments allocated to expanding capacity in small appliances;
2) RMB1,200m for developing global R&D centres and upgrading existing R&D facilities; and 3)
RMB1,600m to upgrade the company’s information and software infrastructure.
In terms of dividend payout, Midea has a dividend policy of paying out more than one third of its
earnings. Midea paid out a 63.4% dividend in 2103 and 40.1% in 2014. We forecast the dividend payout
ratio to remain stable at 40% going forward.
Per forecast in Figure 107, we estimate its net cash position, including investments in wealth management
products, will increase to RMB66.4bn by end-2017 from RMB29.5bn by end-2014.
Figure 107. Cash flows (RMBm)
2013a 2014a 2015e 2016e 2017e
Net cash from operating activities 10,054 24,789 19,369 22,851 25,389 Net cash from investing activities -467 -28,862 -4,000 -4,000 -4,000 - capex -2,115 -2,678 -4,000 -4,000 -4,000 Net cash from financing activities -5,364 -7,410 -8,470 -6,148 -10,958 Net increase in cash 4,223 -11,484 6,900 12,703 10,431 Cash at beginning of year 14,499 19,003 9,772 16,671 29,375 Cash at end of year 19,003 9,772 16,671 29,375 39,806 (Net Debt) / Net Cash 7,649 2,917 12,909 25,598 39,806 (Net Debt)/ Net Cash including wealth management products 8,113 29,511 39,503 52,192 66,400 as % of equity 21% 65% 73% 83% 90%
Source: Company data, HSBC estimates
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Figure 108. Midea earnings estimate summary
(RMBm) Year ended 31 December 2010a 2011a 2012 2013a 2014a 2015e 2016e 2017e
We derive our cash flow forecasts based on working capital forecasts, capex forecasts, and dividend payout.
Gree had 89.8 working capital days in 2014, which steadily increase to 116 days by 2017e, assuming
stable inventory days but slower working capital cycles.
Figure 121. Working capital
2013a 2014a 2015e 2016e 2017e
Inventory Turnover Days 59.6 35.7 46.1 46.1 46.1 Raw material 29.9 18.3 28.0 28.0 28.0
Trade + Bills Receivable Days 146.4 138.5 146.9 146.9 146.9 Trade + Bills+ Deferred rev Payable Days 216.4 166.3 163.3 161.3 159.1 Working Capital Days(Working Capital*365/ COGs) 61.8 89.8 106.7 112.8 115.9
Source: Company data, HSBC estimates
We forecast capex at RMB1.5bn annually in 2015-17e.
Gree’s dividend payout was 41.5% in 2013 and 63.7% in 2014. We forecast the dividend payout ratio at
50% going forward.
We estimate its net cash position products will increase to RMB123bn by the end of 2017e from
RMB54.5bn as at the end of 2014.
We estimate net cash to increase to RMB60.7bn by the end of 2015e from RMB46.5bn at the end of
2014, after annual capex of RMB1.5bn.
Figure 122. Cash flows (RMBm)
2013a 2014a 2015e 2016e 2017e
Net cash from operating activities 12,970 18,939 23,941 33,687 39,234 Net cash from investing activities -2,186 -2,862 -1,500 -1,500 -1,500 Capex -2,461 -1,777 -1,500 -1,500 -1,500 Net cash from financing activities -2,424 -1,864 -6,823 -7,881 -9,421 Net increase in cash 8,360 14,213 15,618 24,306 28,312 Cash at beginning of year 21,370 29,259 54,546 70,164 94,470 Cash at end of year 38,542 54,546 70,164 94,470 122,782 (Net Debt) /Net Cash 32,926 46,540 60,687 83,093 109,337 As % of Equity 93% 103% 114% 131% 146%
Source: Company data, HSBC estimates
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Figure 123. Gree earnings estimate summary
(RMBm) Year ended 31 December 2010a 2011a 2012a 2013a 2014a 2015e 2016e 2017e
We conduct our cash flow forecasts based on working capital forecasts, capex forecasts, and dividend
payout.
Our working capital forecasts assumptions are listed in Figure 141. Qingdao Haier has negative working
capital days of 14 days in 2014, which steadily shortened to 6 days in 2015 by assuming the price war in
the air conditioner market will prolong the working capital cycle.
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Figure 141: Working Capital
2013a 2014a 2015e 2016e 2017e
Inventory Turnover Days 39.0 42.9 42.9 42.9 42.9 Raw materials 15.2 14.2 14.2 14.2 14.2
Trade + Bills Receivable Days 84.5 89.3 89.8 90.3 90.8 Trade + Bills+ Deferred rev Payable Days 166.0 180.6 182.8 185.2 187.5 Working Capital Days (Working Capital*365/ COGs) -13.9 -14.4 -6.4 -7.2 -8.5
Source: Company data, HSBC estimates
We forecast RMB4bn capex in 2015 and RMB2.5bn annually in 2016 and 2017. Of the RMB4bn capex
we expect in 2015, we assume: 1) RMB2bn of investments in smart factories; 2) RMB1.2bn on Sinopec
marketing; and 3) the rest on investments in logistics and acquisitions.
Our capex forecasts do not consider acquisitions from its parent.
Qingdao Haier has a dividend policy of paying out more than 20% earnings. It consistently paid out 30%
each year in 2012-14. We forecast the dividend payout ratio to remain stable at 30% going forward.
As per our forecasts in Figure 142, we estimate its net cash position to increase to RMB33.1bn by the end
of 2017 from RMB25.8bn at the end of 2014.
Figure 142. Cash flows (RMBm)
2013a 2014a 2015e 2016e 2017e
Net cash from operating activities 6,511 7,007 5,230 7,941 9,233 Net cash from investing activities -1,382 -3,251 -4,000 -2,500 -2,500 - Capex -1,757 -2,005 -4,000 -2,500 -2,500 Net cash from financing activities -925 4,359 -1,343 -1,559 -1,799 Net increase in cash 4,205 8,115 -113 3,882 4,935 Cash at beginning of year 16,243 20,421 28,644 28,531 32,413 Cash at end of year 20,421 28,539 28,531 32,413 37,348 (Net Debt)/ Net Cash 18,751 25,835 25,332 28,762 33,175 as % of equity 94% 89% 76% 76% 77%
Source: Company data, HSBC estimates
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Domestic Peers Gree Electric (TP: RMB77.2, Rating: Buy) 000651 CH Dec 31,565 RMB 64.2 9.5% 17.6% 13.6 11.6 9.9 4.4 3.7 3.1 1.4 1.3 1.2 30% 17% 18% 38% 34% 34% Midea (TP: RMB46.9, Rating: Buy) 000333 CH Dec 26,116 RMB 38.4 12.9% 20.9% 15.4 12.1 10.6 4.1 3.4 2.9 1.1 1.0 0.9 -21% 28% 15% 28% 31% 29% Qingdao Haier (TP: RMB35.9, Rating: Buy) 600690 CH Dec 15,130 RMB 30.9 8.0% 15.9% 18.9 16.3 14.1 4.4 3.7 3.1 1.1 1.0 0.9 7% 16% 16% 22% 23% 23% Hangzhou Robam App. 002508 CH Dec 3,326 RMB 42.4 31.6% 35.4% 36.5 26.8 19.9 8.2 6.3 5.0 5.7 4.4 3.3 44% 36% 35% 26% 26% 27% Zhejiang Supor 002032 CH Dec 3,065 RMB 30.0 15.4% 16.4% 27.6 23.5 20.3 5.0 4.3 3.7 2.0 1.7 1.5 17% 17% 15% 20% 19% 19% Zhejiang Dun'An Artificial Env. 002011 CH Dec 2,835 RMB 20.8 14.2% 61.2% 138.7 42.8 53.4 5.0 4.8 4.4 2.7 2.4 2.0 -40% 224% -20% 4% 5% 8% Guangdong Elecpro Elec. Appliance Hldg. 002260 CH Dec 2,487 RMB 58.1 70.5% 114.6% 468.2 403.2 101.7 43.8 43.2 38.0 22.3 15.0 7.7 NA 16% 297% 0% 16% 36% Hisense Kelon Elect.Hdg. 000921 CH Dec 2,483 RMB 14.1 12.9% 40.8% 28.2 15.0 14.2 5.5 4.3 3.8 0.6 0.5 0.5 -46% 88% 5% 22% 19% 17% Zhejiang Kangsheng 002418 CH Jan 2,380 RMB 38.9 -66.6% -64.1% 223.3 147.7 1,728.4 7.8 7.1 85.3 8.0 6.1 71.7 NA 51% -91% 3% 4% 0% Joyoung 002242 CH Dec 2,285 RMB 18.4 12.7% 11.4% 26.3 24.0 21.2 4.6 3.9 3.5 2.4 2.1 1.9 13% 10% 13% 18% 17% 17% Wuxi Little Swan 000418 CH Dec 2,242 RMB 24.0 15.1% 18.1% 21.8 18.6 15.6 3.4 2.9 2.4 1.3 1.1 1.0 69% 17% 19% 17% 16% 17% Jiangsu Changfa Refrig. 002413 CH Dec 2,214 RMB 62.2 NA NA NA NA NA NA NA NA NA NA NA NA NA NA 0% 0% 0% Guangdong Chant Gp. 002616 CH Dec 2,092 RMB 37.0 NA 104.9% 174.6 93.7 41.6 NA 7.4 6.5 NA 7.3 4.5 NA 86% 125% 6% 7% 17% Zhejiang Meida Industrial 002677 CH Dec 1,916 RMB 59.3 14.5% 16.6% 85.9 73.0 63.2 12.0 19.9 9.0 25.3 22.4 19.3 NA 18% 16% 15% 14% 14% Guangdong Xinbao Elect. App.Hdg. 002705 CH Dec 1,819 RMB 25.5 NA NA 52.0 43.2 NA 5.2 4.7 NA 2.0 1.8 NA -7% 20% NA 0% 12% 0% Guangdong Vanward New Electric 002543 CH Dec 1,710 RMB 24.1 18.5% 25.1% 39.6 29.9 25.3 4.1 3.5 3.0 2.7 2.2 1.9 8% 32% 18% 10% 12% 12% Zhenjiang Dongfang Elec. Heating Tech. 300217 CH Dec 1,554 RMB 24.3 42.5% 60.0% 93.6 53.2 36.5 8.3 7.3 6.4 9.4 6.6 4.6 14% 76% 46% 9% 12% 13% Changshu Tianyin Electromechanical 300342 CH Dec 1,507 RMB 46.6 28.0% 36.3% 106.0 70.5 57.0 11.8 8.8 9.6 22.8 16.4 13.9 -13% 50% 24% 12% 15% 17% Aucma 600336 CH Dec 1,493 RMB 13.6 NA NA NA NA NA NA NA NA NA NA NA NA NA NA 0% 0% 0% Vatti 002035 CH Dec 1,319 RMB 22.8 18.2% 25.8% 29.2 23.6 18.4 5.6 4.7 3.7 1.9 1.6 1.4 21% 24% 28% 21% 20% 20% Shai.Highly (Gp.) 600619 CH Dec 1,315 RMB 16.1 NA NA NA 42.4 NA NA 3.3 NA NA 0.8 NA NA NA NA 0% 8% 0% Guangdong Macro 000533 CH Dec 1,222 RMB 11.0 NA NA NA NA NA NA NA NA NA NA NA NA NA NA 0% 0% 0% Hefei Meiling 000521 CH Dec 1,144 RMB 10.2 9.3% 22.1% 26.4 21.7 17.7 2.3 2.1 1.9 0.7 0.6 0.6 8% 22% 22% 9% 9% 10% Huayi Compr 000404 CH Dec 1,111 RMB 12.3 14.4% 22.8% 36.7 29.5 24.3 3.3 3.1 2.8 1.0 0.8 0.8 12% 24% 21% 11% 10% 12% Zhejiang Aishida Elec. 002403 CH Dec 1,065 RMB 27.5 NA NA NA 66.2 49.6 NA 3.7 3.5 NA 2.6 2.2 NA NA 33% 0% 6% 7% Sichuan Yimikang Env. Tech 300249 CH Dec 995 RMB 35.0 NA NA NA NA NA NA NA NA NA NA NA NA NA NA 0% 0% 0% Jiangsu Chunlan Refrigg. Equ.Stk. 600854 CH Dec 984 RMB 11.7 NA NA NA NA NA NA NA NA NA NA NA NA NA NA 0% 0% 0% Guangdong Homa App. 002668 CH Dec 967 RMB 36.2 NA 24.9% 29.4 24.8 18.9 NA 3.4 2.9 NA 1.0 0.9 4% 19% 32% 0% 15% 16% Ningbo Snlt.Elect.Appc. 002473 CH Jan 853 RMB 33.0 -65.7% -63.5% 36.4 23.4 273.1 4.1 3.3 38.7 1.5 1.1 12.7 NA 56% -91% 10% 14% 1% Guangdong Huasheng Elect.App. 002670 CH Dec 604 RMB 18.7 NA NA NA NA NA NA NA NA NA NA NA NA NA NA 0% 0% 0% Average 11% 27% 78.6 55.7 119.8 7.6 6.8 11.1 5.8 4.2 7.1 7% 43% 27% 10% 12% 12%
Source: Thomson Reuters Datastream, I/B/E/S consensus estimates, HSBC estimates for covered companies. Ranked by market cap (USD). calendarised to December.
HK Peers Haier Electronics (TP: HKD26.5, Rating: Buy) 1169 HK Dec 8,466 HKD 23.1 12.2% 17.2% 21.3 18.3 15.5 4.3 3.5 2.8 0.6 0.6 0.5 14% 17% 17% 25% 22% 21% Skyworth Digital 751 HK Mar 2,827 HKD 7.7 11.0% 4.9% 12.4 11.9 11.3 1.8 1.6 1.5 0.5 0.5 0.4 24% 4% 6% 16% 14% 14% Hisense Kelon Elect. 921 HK Dec 2,483 HKD 7.4 NA NA NA 10.6 8.7 NA 1.4 1.0 NA 0.4 0.4 NA NA 22% 0% 27% 25% TCL MLTM.Tech. 1070 HK Dec 1,159 HKD 6.7 8.1% 43.2% 37.6 22.9 18.4 2.0 1.8 1.7 0.3 0.2 0.2 NA 65% 25% 5% 8% 9% Haier Healthwise 348 HK Jan 757 HKD 1.0 NA NA NA NA NA NA NA NA NA NA NA NA NA NA 0% 0% 0% Welling Holding 382 HK Dec 694 HKD 1.9 NA NA NA 4.7 NA NA NA NA NA 0.4 NA NA NA NA 0% 22% 0% Aupu Group Holding 477 HK Dec 308 HKD 2.3 NA NA NA NA NA NA NA NA NA NA NA NA NA NA 0% 0% 0% Chigo Holding 449 HK Dec 254 HKD 0.2 NA NA NA 6.5 NA NA 0.5 NA NA 0.2 NA NA NA NA 0% 8% 0% Average 10% 22% 23.8 12.5 13.5 2.7 1.8 1.8 0.5 0.4 0.4 19% 28% 17% 6% 13% 9% International Peers General Electric GE US Dec 274,871 USD 27.3 -5.5% -2.8% 16.5 21.2 17.5 2.1 2.4 2.5 1.8 2.2 2.1 1% -22% 21% 13% 9% 12% Samsung Electronics 005930 KS Dec 170,944 KRW 1,303,000 3.5% 7.8% 8.3 7.6 7.1 1.2 1.0 0.9 0.9 0.9 0.9 -22% 9% 7% 15% 14% 14% Panasonic 6752 JP Mar 35,533 JPY 1,806.5 2.5% 18.5% 24.4 20.6 17.4 2.4 2.1 1.9 0.6 0.6 0.5 NA 18% 19% 10% 11% 12% Hitachi 6501 JP Mar 32,803 JPY 846.4 2.6% 17.0% 15.0 12.4 10.9 1.4 1.3 1.2 0.4 0.4 0.4 12% 20% 14% 10% 10% 11% Whirlpool WHR US Dec 14,703 USD 187.0 7.2% 15.8% 16.4 15.1 12.2 3.0 2.8 2.4 0.7 0.7 0.6 14% 9% 23% 0% 17% 18% Bosch (TP: INR22,700, Rating: Hold) BOS IN Mar 11,515 INR 22,744.1 14.1% 30.3% 58.3 46.1 34.4 10.1 8.6 7.1 6.5 6.1 5.0 36% 26% 34% 19% 20% 23% Electrolux ELUXB SS Dec 9,397 SEK 258.6 7.4% 20.3% 22.9 22.5 15.8 4.5 3.9 3.4 0.7 0.6 0.6 15% 2% 42% 22% 18% 23% LG Electronics (TP: KRW64,000, Rating: Hold) 066570 KS Dec 8,150 KRW 55,400 3.5% 54.8% 25.0 12.8 10.4 0.9 0.8 0.7 0.2 0.1 0.1 126% 95% 23% 3% 6% 7% Average 4% 20% 23.3 19.8 15.7 3.2 2.9 2.5 1.5 1.4 1.3 26% 20% 23% 12% 13% 15%
Source: Thomson Reuters Datastream, I/B/E/S consensus estimates, HSBC estimates for covered companies. Ranked by market cap (USD). Calendarised to December
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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Lina Yan and Erwan Rambourg
Important disclosures
Equities: Stock ratings and basis for financial analysis HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis: The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities
As of 05 June 2015, the distribution of all ratings published is as follows:
Buy 39% (29% of these provided with Investment Banking Services) Hold 43% (29% of these provided with Investment Banking Services) Sell 18% (20% of these provided with Investment Banking Services)
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For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.
HSBC & Analyst disclosures Disclosure checklist
Company Ticker Recent price Price Date Disclosure
GREE ELECTRIC APPLIANCES 000651.SZ 62.53 04-Jun-2015 4, 5, 6, 7MIDEA GROUP CO LTD 000333.SZ 38.03 04-Jun-2015 2, 6, 7
Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company. 4 As of 30 April 2015 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 April 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 April 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 April 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
Additional disclosures 1 This report is dated as at 05 June 2015. 2 All market data included in this report are dated as at close 01 June 2015, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
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Disclaimer * Legal entities as at 30 May 2014 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch
Issuer of report The Hongkong and Shanghai Banking Corporation Limited Level 19, 1 Queen’s Road Central Hong Kong SAR Telephone: +852 2843 9111 Fax: +852 2596 0200 Website: www.research.hsbc.com
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited
Lina Yan* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4344 [email protected]
Lina Yan joined HSBC in May 2010 as a Hong Kong and China consumer analyst. Prior to this, she worked for six years as a buy-side analyst, spending three years covering the consumer and property sectors at a Hong Kong-based institutional fund house specialising in China equities and another three years as an investment analyst in Canada. Lina holds an MSc in finance from the University of British Columbia.
Erwan Rambourg* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6572 [email protected]
Erwan Rambourg is Global Co-Head of Consumer & Retail Research and a top-ranked analyst covering the luxury and sporting goods sectors. Erwan joined HSBC in 2005 after working for eight years as a marketing manager in the luxury goods industry, notably for Richemont and LVMH. He is regularly featured in the Wall Street Journal and the Financial Times, and appears on CNBC and Bloomberg. He is the author of The Bling Dynasty - Why the Reign of Chinese Luxury Shoppers Has Only Just Begun, a book published by Wiley in September 2014.
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations