China Home Appliances Sector

Transcription

1 Asia Pacific/China Equity Research Consumer Electronics Research Analysts Eva Wang China Home Appliances Sector INITIATION Winners take all Figure 1: China home appliance sector growth forecasts (%) Residential AC Central AC Refrigerator Washing machine TV Small appliances and others Historical 3-year CAGR (211-13) Forecast 3-year CAGR (214-16E) Note: In terms of market size growth. Source: China Market Monitor (CMM), China IOL, DisplaySearch, Credit Suisse estimates We initiate coverage on the China home appliances sector. We forecast 8.1% sector growth for E on urbanisation and consumption upgrade. Among the six subsectors, we favour small appliances, air conditioner (AC) and washing machines. We believe the segment leaders would stand out from peers with a differentiating product portfolio, a strong brand name and R&D capabilities. These include QD Haier, Midea Group, Gree, Hisense Electric, TCL Corp, Skyworth and Hisense Kelon, on which we initiate coverage with OUTPERFORM ratings. Wrong market perceptions weighing on valuation. The key players of the China home appliance sector are trading at 8.8x 215E P/E, with a 17% three-year earnings CAGR. We believe the sector as a whole is undervalued, given some wrong perceptions by the market on the technology entry barriers, sector's growth potential, customer behaviour and e-commerce. Our top picks are QD Haier, Midea and Gree. We like QD Haier for its stable growth and asset injection potential (17% earnings upside potential not factored in forecasts), Midea for its fast-growing small appliances and margin enhancement, and Gree for its strong R&D capability in the AC market. Risks to our call include consumption trends, regulatory changes, corporate governance and adverse price competition. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Focus charts and tables Figure 2: China home appliance market growth (Rmb bn) (%) 1, Figure 3: Market size breakdown by subsector (214E) Small appliances 25% Residential AC 21% Central AC 1% E 215E 216E Total sales value YoY chg - RHS -8. TV 24% WM 8% Refrigerator 12% Source: CMM, China IOL, DisplaySearch, Credit Suisse estimates Source: CMM, China IOL, DisplaySearch, Credit Suisse estimates Figure 4: China home appliance sector analysis 3Y CAGR% E Growth drivers Key risk factors Key beneficiaries Residential AC Penetration improvement, income growth, new product function Price competition, product quality, service quality Gree (#1), Midea (#2), QD Haier (#3), Hisense Kelon (#4) Central AC Increasing application in infrastructure, Foreign competition, high Gree, Midea, QD Haier large houses, subways, etc. requirement on R&D Refrigerator New technology and product, upgrade demand, export market High penetration QD Haier (#1), Hisense Kelon (#2), Midea (#6) Washing machine Lifestyle change (washer + dryer) and new product High penetration QD Haier (#1) Midea (#2) TV Vertical integration, export market, new product generation Saturated penetration, fierce competition Hisense Elec (#1), Skyworth (#2), TCL (#3) Small appliances and others * Low penetration, change of lifestyle, new product functions, environmental and health requirement Competition, margin pressure and product quality Midea (kitchenware, water purifier), Haier (water heater), Robam (kitchenware) Total Note: *Small appliances and others include water heater, kitchenware, air/water purifier, etc. Source: CMM, China IOL, DisplaySearch (for TV), Credit Suisse estimates Figure 5: Rating, target price, and valuation method 5-yr Hist. Net Market Price Target Pot. Target avg avg Target P/E 3Y CAGR cash cap (loc (loc upside CS price fwd fwd PEG PEG (x) Earnings EPS to MC Name Ticker (U$ mn) curr) curr) (%) rating multiple P/E P/E (x) (x) CY14E CY15E CY16E (%) (%) (%) Qingdao Haier 669.SS 7, O Midea Group 333.SZ 14, O Gree 651.SZ 13, O Haier Electronics 1169.HK 7, O Hisense Electric 66.SS 2, O TCL Corporation 1.SZ 4, O n.a. Skyworth Digital 751.HK 1, O n.a. Hisense Kelon - A 921.SZ 1, O Simple average Weighted average Source: Company data, Credit Suisse estimates China Home Appliances Sector 2

3 Winners take all Riding on consumption upgrade The China home appliance sector is composed of: (1) large white appliances (e.g., refrigerator, AC and washing machine), (2) black appliances (e.g., LCD TV, DVD, etc.) and (3) small appliances (e.g., kitchenware, air/water purifier). The whole sector achieved an average CAGR of 7.9% during For E, we expect a sector CAGR of 8.1%, driven by (1) double-digit growth of small appliances and AC, especially central AC, (2) income growth and consumption upgrade, and (3) urbanisation and lifestyle changes. Most/least-favoured subsectors Among the six subsectors (Figure 4), we favour: (1) small appliances (a 15.7% CAGR on low penetration and rapid lifestyle change); (2) air conditioners (especially an 18.6% CAGR for central AC on high entry barriers from R&D requirement and increasing application in infrastructure and households); and (3) washing machines (recovering to an 8.8% CAGR from a low 3.2% CAGR over the past three years). We dislike the TV subsector, whose growth should decelerate to negative 3% CAGR from 1% in the past three years (mainly due to high penetration of over 12%). We believe only leaders may survive and gain market share in the TV subsector, as smaller players may lose market share to large ones due to disadvantage in pricing power and new product development. Wrong perceptions weighing on valuation The key players of China home appliances sector is trading at 8.8x 215E P/E, with a 17% three-year earnings CAGR. We believe the sector as a whole is undervalued, given some wrong perceptions by the market on the technology entry barriers, sector's growth potential, customer behaviour and preferences, as well as opportunities and risks from fast-growing e-commerce development. We believe the steady ASP growth and attractive new product functions are solid proof that the home appliances market is not a low tech commodity business without growth. On the contrary, product upgrade will be a key differentiation factor for leading industry players. Top picks: QD Haier, Midea and Gree We believe the segment leaders, who have a differentiating product portfolio, a reputable brand name, solid execution, strong R&D capability and speedy response to new industry trends, would stand out from peers. Among the 5+ home appliances companies listed in the A-share market and Hong Kong, we initiate coverage on QD Haier, Midea Group, Gree, Hisense Electric, TCL Corp, Skyworth and Hisense Kelon with an OUTPERFORM rating, due to their leadership positions in their respective subsectors, stable or strong earnings growth and low valuation multiples (average 8.8x 215E P/E). Our top picks for the sector are QD Haier, Midea Group and Gree: (1) we like QD Haier for its stable growth, healthy financial position (net cash = 53% market cap), and potential asset injection from parentco which may bring 17% earnings upside potential based on our estimates; (2) for Midea Group, we like its diversified portfolio and fast-growing small appliances business, product mix and margin improvement, as well as its share repurchase plan for management incentives; and (3) for Gree, we like its strong R&D in the AC market and rich cash on hand (net cash = 41% market cap). Key investment risks include: (1) macroeconomic growth and consumption demand; (2) regulatory/simulative/environmental policy change, (3) raw material and labour cost inflation; (4) product recall; and (5) corporate governance risks. We expect the China home appliance sector CAGR at 8.1% for E Prefer small appliances, AC and washing machine over refrigerator and TV We believe there are misperceptions on technology entry bariers, growth, customers and e- commerce We believe the leading industry players can stand out from peers QD Haier's net cash on hand = 53% of its market cap China Home Appliances Sector 3

4 Investment thesis Figure 6: Key investment thesis of stocks China home appliances sector Stocks Ratings Key investment thesis Qingdao Haier (669.SS) Midea Group (333.SZ) Gree (651.SZ) Haier Electronics (1169.HK) Hisense Electric (66.SS) TCL Corporation (1.SZ) Skyworth (751.HK) Hisense Kelon (921.SZ/ 921.HK) Initiate with OUTPERFORM and a target price of Rmb22. Initiate with OUTPERFORM and a target price of Rmb3. Initiate with OUTPERFORM and a target price of Rmb39. Maintain OUTPERFROM and a target price of HK$25.5 Initiate with OUTPERFORM and a target price of Rmb13. Initiate with OUTPERFORM and a target price of Rmb3.6 Initiate with OUTPERFORM and a target price of HK$5. Initiate with OUTPERFORM and a target price of Rmb1.7 Source: Credit Suisse estimates We like Qingdao Haier's leadership position in the white appliances sector, management's strategic vision and commitment, stable growth and healthy financial position (net cash = 53% market cap), as well as potential asset injection and M&A opportunities. We expect to see: (a) stable growth from white appliances manufacturing, especially driven by the fast-growing air conditioner sales; and (b) new business initiatives in logistics, e-commerce and O2O platform. We see potential asset injection within 15 months to be the key catalyst which may bring earnings upside equivalent to 17% of 215E net profit based on our assumptions. Our target price of Rmb22. is based on a target 12.x 215E P/E (or target stub P/E of 1.8x), at a premium to key industry players' five-year average forward P/E of 11x due to its leadership position and potential asset injection. We like Midea's product portfolio diversification, exposure to the fast-growing small appliances market, product mix and margin improvement, as well as management's commitment and e- commerce strategy. We believe Midea Group will benefit from: (a) strong R&D and new product development; (b) a well-diversified small appliances portfolio; and (c) commitment to new industry trend, such as its smart home system M-Smart and e-commerce development. Catalysts include strong EPS growth and share repurchase plan. Our target price of Rmb3. is based on a target 1.x 215E P/E, at a discount to key industry players' five-year average forward P/E of 11x due to a lack of track record. We like Gree's leadership position in the AC market, strong R&D capabilities and strong financial position (net cash = 41% market cap), which is unjustified by the current low valuation multiple. Gree has strong R&D capabilities, and its No.1 position in the AC market helps it maintain higher margins than peers. The main catalyst is overhang on parent co's shareholding change to be removed. Our target price of Rmb39. is based on a target 8.x 215E P/E, at a discount to key industry players' five-year average forward P/E of 11x, but in line with its own five-year average forward P/E. We believe ICS is a key growth driver for Haier Elec. We expect third party distribution business to deliver a decent revenue CAGR of 32% on network expansion and Goodaymart (RRS) platform expansion. Its third party logistics business is expected to benefit from the strategic cooperation and M&As. The stock is trading at 15.6x 215E P/E. Our target price of HK$25.5 is based on a 19.1x SOTP-implied 215E P/E. We like the company as a consolidator in the domestic market with high product quality and innovation, and an explorer in overseas market transitioning from an OEM/developing market to the original branding/developed market. Its TV products are characterised by high quality and innovative features, with R&D expense accounting for c.4% of net revenue, highest among traditional TVmakers. Its LCD TV global market share increased to 5.6% in 1Q14 (5.% in 1Q13), with even better performance in the 4K/big screen TV market. Catalysts on the stock include improving profitability in the export market and increasing smart TV penetration. Our target price of Rmb13. is based on 11.x 215E P/E, generally in line with key industry players' five-year average forward P/E of 11x. We like growth of TCL's CSOT unit and mobile business, which should become the new driver of future growth, although the growth of its TV business decelerates amid fierce competition. For CSOT, we estimate it should contribute 18-27% of total revenue. Its EBIT contribution should be even higher, with 29-4% of total in E, at a 3Y EBIT CAGR of 39%. For telecom, we estimate it should account for 24-3% of total revenue, and 36-4% EBIT (at a 3Y EBIT CAGR of 24%) in E as its smartphone business rises from a relatively low base. Catalysts for the stock include gradual ramping up of panel production capacity and growth of the smartphone industry. Our target price of Rmb3.6 is based on 12.5x 215E P/E, at a premium to key industry players' five-year average forward P/E of 11x, due to its high growth potential from vertical integration. We like Skyworth as one of the leading TV brands in China with an extensive sales network in Tier 3/4 cities and rural areas. For FY3/15, we believe TV shipment should be stable with product mix upgrade. The catalysts include: (a) faster-than-expected shipment growth in 2H FY3/15; and (b) stronger revenue growth in non-tv businesses, especially for the white appliances business. Our target price is based on 8.5x adjusted CY15E P/E, at a discount to key industry players' five-year simple average fwd P/E of 11.1x, due to fierce competition and subdued growth in the TV sector. We like the Hisense Kelon's recovery story with greater growth potentials compared to its peers. The recovery is on track with the air conditioner business being the main driver. We estimate that air conditioner will account for 47%/54% of revenue/gp in 215E from 38%/39% in 213 on the back of (1) volume increase and (2) margin expansion due to product mix improvement. We expect Hisense Kelon 's revenue to grow at 11-13% and recurring earnings to grow at 22-31% during E which is higher than our forecast of 3-1% market size three-year CAGR for refrigerators and ACs. Our target price of Rmb1.7 is based on 1.5x 215E P/E, at a discount to key industry players' fiveyear average forward P/E of 11x, due to a lack of track record since its recovery. China Home Appliances Sector 4

5 Valuation comps Figure 7: Valuation comparison Market Price EPS growth P/E P/B Yield NC/EQT cap (loc (%) (x) (x) (%) (%) Name Ticker (US$ mn) curr) CY14E CY15E CY16E CY14E CY15E CY16E CY14E CY14E FY Qingdao Haier 669.SS 7, Midea Group 333.SZ 14, Gree 651.SZ 13, Haier Electronics 1169.HK 7, Hisense Electric 66.SS 2, TCL Corporation 1.SZ 4, Skyworth Digital 751.HK 1, Hisense Kelon - A 921.SZ 1, Weighted average Refrigerators Qingdao Haier 669.SS 7, Hisense Kelon - A 921.SZ 1, Midea Group 333.SZ 14, Aucma 6336.SS n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2. Homa 2668.SZ n.a Meiling 521.SZ Weighted average Washing machines Haier Electronics 1169.HK 7, Hefei Sanyo 6983.SS 1, Little Swan 418.SZ Weighted average Air conditioners Gree 651.SZ 13, Midea Group 333.SZ 14, Qingdao Haier 669.SS 7, DunAnEnvironment 211.SZ 1, n.a n.a Chunlan 6854.SS n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a Chigo 449.HK n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a Daikin Industries 6367.T 16,935 6, Ingersoll-Rand IR.N 15, Weighted average Water heaters Haier Electronics 1169.HK 7, Jiangsu Sunrain SS 1, Vanward 2543.SZ Vatti 235.SZ Macro 533.SZ n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a A O Smith AOS.N 4, Rinnai 5947.T 4,446 9, Noritz 5943.T 935 1, Weighted average Source: Company data, Credit Suisse estimates, I/B/E/S consensus China Home Appliances Sector 5

6 Figure 7: Valuation comparison (cont'd) Market Price EPS growth P/E P/B Yield NC/EQT cap (loc (%) (x) (x) (%) (%) Name Ticker (US$ mn) curr) CY14E CY15E CY16E CY14E CY15E CY16E CY14E CY14E FY TVs Hisense Electric 66.SS 2, Skyworth Digital 751.HK 1, Changhong 6839.SS 3, n.a. n.a. n.a. n.a. n.a. n.a MTC 2429.SZ 2, Xiamen Electronic 687.SS n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.m. Konka 16.SZ n.a. n.a. n.a n.a. n.a. n.a. n.a TCL Multimedia 17.HK n.a Weighted average Kitchenware Robam 258.SZ 1, Supor 232.SZ 1, Joyoung 2242.SZ 1, Xinbao Electrical 275.SZ 1, n.a n.a Elecpro Electric 226.SZ n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a Zhejiang Meida 2677.SZ n.a n.a. n.a. n.a. 4.7 Lung Cheong 348.HK n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a Weighted average Distributors Suning Appliance 224.SZ 9, n.a. n.a. n.a. n.a. n.a. n.a GOME 493.HK 2, JD.com JD.OQ 34, n.a. n.a. n.a. n.a. n.a. n.a Weighted average International peers Samsung Electronics 593.KS 154,472 1,14, Mitsubishi Electric 653.T 26,27 1, Panasonic 6752.T 25,95 1,2.5 n.a Whirlpool WHR.N 12, LG Electronics 6657.KS 9,995 64,3 n.a Electrolux ELUXb.ST 7, SEB SEBF.PA 3, De Longh DLG.MI 2, Indesit IND.MI 1, n.a Simple average Weighted average Total simple average Total weighted average Source: Company data, Credit Suisse estimates, I/B/E/S consensus China Home Appliances Sector 6

7 Figure 8: Business comps Revenue Name Ticker (US$ mn) Business description (revenue breakdown) Qingdao Haier 669.SS 14,52 Refrigerator 29%, air conditioner 21%, washing machine 16%, water heater 5%, ICS 19%, others 1% Midea Group 333.SZ 19,72 Air conditioner 51%, small appliances 23%, washing machine 7%, refrigerator 7%, others 12% Gree 651.SZ 19,446 Air conditioner 88%, small appliances 1%, others 11% Haier Electronics 1169.HK 1,167 Washing machine 8%, water heater 1%, ICS 91% Hisense Electric 66.SS 4,634 TV 91%, set-top box 2%, non-core business 7% TCL Corporation 1.SZ 13,886 Multimedia 37%, mobile phone 18%, LCD panel 18%, white appliances 11%, laptop distribution 15%, others and elimination 1% Skyworth Digital 751.HK 5,89 TV 75%, set-top box 11%, white appliances 6%, others 8% Hisense Kelon 921.SZ 3,962 Refrigerator 41%, air conditioner 38%, other products 12%, non-core business 9% Refrigerators Qingdao Haier 669.SS 14,52 Refrigerator 29%, air conditioner 21%, washing machine 16%, water heater 5%, ICS 19%, others 1% Hisense Kelon 921.SZ 3,962 Refrigerator 41%, air conditioner 38%, other products 12%, non-core business 9% Midea Group 333.SZ 19,72 Air conditioner 51%, small appliances 23%, washing machine 7%, refrigerator 7%, others 12% Aucma 6336.SS 72 Refrigerator 65%, electric bicycle 14%, washing machine 6%, kitchenware 6%, others 9% Homa 2668.SZ 693 Refrigerator 1% Meiling 521.SZ 1,74 Refrigerator 61%, air conditioner 31%, others 8% Washing machines Haier Electronics 1169.HK 1,167 Washing machine 8%, water heater 1%, ICS 91% Hefei Sanyo 6983.SS 865 Washing machine 76%, refrigerator 14%, others 1% Little Swan 418.SZ 1,417 Washing machine 92%, others 8% Air-conditioner Gree 651.SZ 19,446 Air conditioner 88%, small appliances 1%, others 11% Midea Group 333.SZ 19,72 Air conditioner 51%, small appliances 23%, washing machine 7%, refrigerator 7%, others 12% Qingdao Haier 669.SS 14,52 Refrigerator 29%, air conditioner 21%, washing machine 16%, water heater 5%, ICS 19%, others 1% DunAn Environment 211.SZ 1,51 Air conditioner and parts 73%, energy-saving related business 7%, others 2% Chunlan 6854.SS 156 Air conditioner 8%, compressor 5%, others 15% Chigo 449.HK 1,5 Air conditioner 97%, others 3% Daikin Industries 6367.T 16,717 Air conditioner 89%, chemical 8%, others 3% Ingersoll-Rand IR.N 12,351 Air conditioner and refrigeration solutions 76%, industrial technologies 24% Water Heaters Haier Electronics 1169.HK 1,167 Washing machine 8%, water heater 1%, ICS 91% Jiangsu Sunrain SS 51 Solar water heater 91%, others 9% Vanward 2543.SZ 63 Water heater 48%, kitchen appliances 42%, others 1% Vatti 235.SZ 62 Water heater 23%, ventilator 45%, stove 28%, others 4% Macro 533.SZ 375 Water heater and stove 96%, others 4% A O Smith AOS.N 2,154 Water heater products 1% Rinnai 5947.T 2,69 Water heater 51%, kitchen appliances 31%, air conditioner 6%, others 12% Noritz 5943.T 1,878 Water heater and air conditioner 1% TVs Hisense Electric 66.SS 4,634 TV 91%, set-top box 2%, non-core business 7% Skyworth Digital 751.HK 5,89 TV 75%, set-top box 11%, white appliances 6%, others 8% Changhong 6839.SS 9,535 TV 33%, digital products 22%, air conditioner 16%, intermediate products 16%, others 13% MTC 2429.SZ 1,13 TV 79%, set-top box 9%, others 12% Xiamen Electronic 687.SS 192 TV 94%, others 6% Konka 16.SZ 3,256 TV 79%, mobile phone 8%, white appliances 7%, others 6% TCL Multimedia 17.HK 5,91 TV 95%, others 5% Source: Company data, the BLOOMBERG PROFESSIONAL service, as of last reported full-year financial statements. China Home Appliances Sector 7

8 Figure 8: Business comps (cont'd) Revenue Name Ticker (US$ mn) Business description (revenue breakdown) Kitchenware Robam 258.SZ 429 Ventilator 57%, stove 28%, other kitchen appliances 13%, others 2% Supor 232.SZ 1,36 Household electronics 56%, kitchenware 42%, others 2% Joyoung 2242.SZ 865 Soymilk machine 55%, nutritional pot 25%, induction stove 14%, others 6% Xinbao Electrical 275.SZ 817 Coffee machine 19%, electric kettle 16%, other kitchenware 5%, others 15% Elecpro Electric 226.SZ 111 Rice cooker 62%, other kitchenware 38% Zhejiang Meida 2677.SZ 63 Integrated kitchen products 1% Lung Cheong 348.HK 25 Toys 89%, consumer electronics 8%, kitchen products 3% Distributors Suning Appliance 224.SZ 17,139 Black goods 21%, IT products 17%, communication products 17%, white goods 16%, small appliances 14%, air conditioner 12%, others 3% GOME Electrical Appliances Holding 493.HK 9,21 Black goods 15%, refrigerator & washing machine 2%, communication products 15%, air conditioner 24%, small appliances 12%, others 14% Limited JD.com JD.OQ 11,323 Sales of electronic products 82%, sales of general merchandise products 15%, services and others 3% International peers Samsung Electronics 593.KS 149,28 Telecom equipment 6%, semiconductor & LCD 21%, digital media equipment & electronic appliances 19% Mitsubishi Electric 653.T 23,256 Home appliances 23%, energy & electric systems 29%, industrial automation systems 27%, information & Communication systems 13%, others 8% Panasonic Corporation 6752.T 72,531 TV & AV 2%, home appliances 12%, automotive & industrial systems 36%, eco solutions 22%, others 1% Whirlpool WHR.N 18,769 Washing machine 29%, refrigerator 29%, home cooking appliances 18%, others 24% LG Electronics 6657.KS 54,71 TV 39%, Mobile 21%, home appliances 22%, air-conditioning and energy solution 8%, others 1% Electrolux ELUXb.ST 15,2 Major appliances 87%, small appliances 8%, others 5% SEB SEBF.PA 5,313 Household appliances 1% De Longh DLG.MI 2,51 Household appliances 1% Indesit IND.MI 3,695 Kitchenware 49%, washing machine & dishwasher 41%, others 1% Source: Company data, the BLOOMBERG PROFESSIONAL service, as of last reported full-year financial statements. China Home Appliances Sector 8

9 Table of contents Focus charts and tables... 2 Winners take all... 3 Investment thesis... 4 Valuation comps... 5 Riding on consumption upgrade... 1 Sector growth: Forecast an 8.1% CAGR in E... 1 Income growth and consumption upgrade Urbanisation and lifestyle changes Most/least-favoured subsectors Small appliances: 15.7% 3Y CAGR for E Air conditioner: Central AC taking the lead Washing machines: Improve to an 8.8% 3Y CAGR... 2 Wrong perceptions weighing on valuation Misperception 1: Low tech commodity business Misperception 2: Low or no growth Misperception 3: Consumers don't upgrade, and they use one item for ten years Misperception 4: Loser to the e-commerce threat Top picks: QD Haier, Midea and Gree Investment recommendations Key assumptions by product... 3 Target price and valuation Investment risks Investment risks for companies under coverage Appendix I: Company session... 4 Qingdao Haier Co., Ltd. (669.SS / 669 CH) Midea Group (333.SZ / 333 CH)... 5 Gree Electric Appliance (651.SZ / 651 CH) Haier Electronics Group Co., Ltd. (1169.HK / 1169 HK) Hisense Electric Co., Ltd (66.SS / 66 CH) TCL Corporation (1.SZ / 1 CH) Skyworth Digital (751.HK / 751 HK) Hisense Kelon Electrical Holdings Company Limited (921.SZ / 921 CH) Appendix II: Sector fundamentals Air conditioners: Domestic outgrows export, central AC has more potential Refrigerators: Product upgrade offsets slow growth Washing machines: New design and functions attract customers Television: Exports and upgrade drive demand Water heaters: Increasingly a household must Kitchenware: Ride on changing lifestyle Other small appliances: Air/water purifiers grow fast Appendix III: Macro environment Income growth to stimulate upgrade demand, especially in rural areas Urbanisation progression, another driving force More new households and marriage to stimulate first-buyer demand Higher CPI over PPI favours profitability of home appliance-makers Property market influence starts to diminish Appendix IV: Chinese players China Home Appliances Sector 9

10 Riding on consumption upgrade The China home appliances sector comprises: (1) large white appliances (e.g., refrigerator, AC and washing machine), (2) black appliances (e.g., LCD TV, DVD, etc.) and (3) small appliances (e.g., kitchenware, air/water purifier). The whole sector achieved an average CAGR of 7.9% for For E, we expect a sector CAGR of 8.1%, driven by (1) double-digit growth in small appliances and ACs, especially central AC, (2) income growth and consumption upgrade, and (3) urbanisation and lifestyle changes. Drivers: small appliances and AC; income growth and consumption upgrade; urbanisation and lifestyle change Figure 9: China home appliances market growth (Rmb bn) (%) 1, Figure 1: Market size breakdown by subsector (214E) Small appliances 25% Residential AC 21% Central AC 1% E 215E 216E Total sales value YoY chg - RHS -8. TV 24% WM 8% Refrigerator 12% Source: CMM, China IOL, DisplaySearch, Credit Suisse estimates Sector growth: Forecast an 8.1% CAGR in E Source: CMM, China IOL, DisplaySearch, Credit Suisse estimates The China home appliances sector is comprehensive, including large white appliances (e.g., air conditioners, washing machines, refrigerators and freezers), black appliances (e.g., LCD TV, DVD, etc.) and small appliances (e.g., rice cookers and other kitchenware, air/water purifiers, etc.). It is slightly different from consumer appliances, which also include mobile handsets and some digital appliances. As shown in Figure 11, we estimate that the China home appliances market will achieve an 8.1% three-year CAGR in E, driven by urbanisation, improving penetration and consumer lifestyle changes. The growth rate is largely flat compared with the 7.9% CAGR for , but with different driving forces last time, the sector growth was led by residential ACs and TVs, while this round small appliances and central ACs are expected to achieve higher growth. We expect small appliances to achieve a 15.7% market size CAGR in E and central AC a 18.6% CAGR. Expect small appliances to achieve a 15.7% market size CAGR in E and central AC a 18.6% CAGR China Home Appliances Sector 1

11 Color TV Residential AC Refrigerator Washing machine Heater Kitchen ventilator Gas stove Water purifier Rice cooker Air purifier Food processor Water dispenser Induction cooker Microwave oven (Rmb bn) 24 October 214 Figure 11: China home appliances sector analysis 3Y CAGR% E Growth drivers Key risk factors Key beneficiaries Residential AC Penetration improvement, income growth, new product function Central AC Increasing application in infrastructure, large houses, subways, etc. Refrigerator New technology and product, upgrade demand, export market Washing machine Lifestyle change (washer + dryer) and new product TV Vertical integration, export market, new product generation Small appliances Low penetration, change of lifestyle, and others * new product functions, environmental and health requirement Total Price competition, product quality, service quality Gree (#1), Midea (#2), QD Haier (#3), Hisense Kelon (#4) Foreign competition, high Gree, Midea, QD Haier requirement on R&D High penetration QD Haier (#1), Hisense Kelon (#2), Midea (#6) High penetration QD Haier (#1) Midea (#2) Saturated penetration, Hisense Elec (#1), Skyworth fierce competition (#2), TCL (#3) Competition, margin Midea (kitchenware, water pressure and product purifier), Haier (water heater), quality Robam (kitchenware) Note: *Small appliances and others include water heater, kitchenware, air/water purifier, etc. Source: CMM, China IOL, DisplaySearch (for TV), Credit Suisse estimates Figure 12: China home appliances retail sales value by product breakdown (214E) % 8% 7% 6% 5% 4% 3% 2% 1% % -1% -2% Retail sales value YoY (RHS) Source: China Market Monitor Income growth and consumption upgrade The income level in China has continued to increase YoY since 25. The disposable income per capita in the urban areas has experienced growth of more than 1% most of the time since 24, and in the rural areas increased even faster despite higher fluctuations. As shown in Figure 13 to Figure 16, an increase in income level supports the expenditure level to grow accordingly. Growth of urban/rural consumption expenditures correlates positively with the income growth, at a rate quite close to, if not more than, 1% YoY. Income level in China has continued to grow >1% YoY, supporting expenditure growth China Home Appliances Sector 11

12 Figure 13: Urban disposable income vs expenditure YoY 35% 3% 25% 2% 15% 1% 5% % 1Q3 1Q4 1Q5 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 1Q12 1Q13 1Q14-5% -1% -15% Urban disposable income per capita YoY Urban consumption exp per capita YoY Urban household facility & service exp per capita YoY Source: NBS, Credit Suisse estimates Figure 15: Annual urban income/exp per capita YoY 25% 2% 15% 1% 5% Figure 14: Rural cash income vs expenditure YoY 5% 4% 3% 2% 1% % 1Q3 1Q4 1Q5 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 1Q12 1Q13 1Q14-1% -2% Rural cash income per capita YoY Rural cash consumption exp per capita YoY Rural household facility & service exp per capita YoY Source: NBS, Credit Suisse estimates Figure 16: Annual rural income/exp per capita YoY 35% 3% 25% 2% 15% 1% 5% % % Annual urban disposable income per capita YoY Annual rural cash income per capita YoY Annual urban consumption exp per capita YoY Annual rural cash consumption exp per capita YoY Annual urban household facilities exp per capita YoY Annual rural household facilities exp per capita YoY Source: NBS, Credit Suisse Source: NBS, Credit Suisse Consumer preferences: It's not just about price, but also function and brands Although consumers are still sensitive to retail prices, they also get more awareness of the functionality, branding, after-sales service and product design, according to a survey done by CCW Research in August 213 (Figure 17). And they start to get information other than traditional advertising platform. For example, many people now rely on referrals by friends or e-commerce promotions (Figure 18). We believe changes in customer behaviour and preferences are partly related to the faster income growth than product price growth as shown in Figure 19 and Figure 2. We believe these new consumer preferences will result in differentiation strategies for manufacturers, especially for white appliances, as product upgrades will be a dominating theme in the next couple of years. Those with strong brand power and attractive new functions will attract more consumers. Strong brand power and function upgrade shall attract more customers China Home Appliances Sector 12

13 (Rmb/unit) 24 October 214 Figure 17: Decision-making consideration Figure 18: Methods of acquiring product information Prices 68.6% Referral by friends 5.2% Functionality 63.4% Promotion on e-commerce platforms 41.5% Brand power After-sale services 46.% 63.4% Promotion on brands' websites Recommendation by sales person Mobile & outdoor Advertisements 38.3% 35.9% 29.3% Design and size 44.6% Others 2.4%.% 2.% 4.% 6.% 8.%.% 2.% 4.% 6.% Source: CCW Research, as of August 213 Source: CCW Research, as of August 213 Figure 19: Average unit price of home appliance products 4, 3,5 3, 2,5 2, 1,5 1, 5 Color TV Refrigerator Washing machine 25 ASP 213 ASP 8 Year CAGR (RHS) AC 9% 8% 7% 6% 5% 4% 3% 2% 1% % Figure 2: Home appliance prices as % of monthly income 25% 23% 21% 19% 17% 15% 13% 11% 9% 7% 5% Color TV Refrigerator Washing machine AC 25 urban 213 urban Source: China Market Monitor Urbanisation and lifestyle changes Source: China Market Monitor China has put great effort in the progression of urbanisation, with the urbanisation rate up from 18% in 1978 to 55% in 213, as shown in Figure 21. Yet, compared to the developed countries such as the US/UK/Japan with an urbanisation rate over 8% (Figure 22), China still has plenty of room to be pushed further. During this progress, we believe newly urbanised cities, characterised with faster economic development and improved living standards, will be another force to drive upgrade demand of household facilities. Considering the higher penetration rate in the urban areas than rural areas, urbanisation progression should increase the penetration ratio of the country as a whole for the home appliances sector. We believe the urbanisation process will not only help increase the home appliance penetration ratio but also lead to the lifestyle change of the new urban residents, therefore create new customers for more sophisticated home appliances, such as those with new technology and function. Urbanisation progression should increase the penetration ratio of home appliances China Home Appliances Sector 13

14 October 214 Figure 21: Urbanisation rate* in China from 2 to % Figure 22: Urbanisation rate in 213 for China and developed countries 1% 5.% 45.% 4.% 35.% 9% 8% 7% 6% 5% 3.% 4% China US UK Gemany France South Korea Japan China urbanization rate Urbanization rate Source: NBS, Credit Suisse Lifestyle changes: Smart appliances/smart home Source: World Bank, Credit Suisse Smart appliances and smart home development is one of the most discussed topics nowadays, especially for those traditional home appliance manufacturers who seek transition to adapt to the internet/mobile era. Smart appliances and smart home system provide personalised services by the means of video monitoring, remote/smart control, body sensors and recognition, and big data collection and analysis, which introduce a whole new lifestyle to many people who never imagined it before. Currently in China, the development is restrained to certain independent appliances, and mainly in improvement of certain functions, e.g., remote control. The part that requires more advanced technology to establish an interaction between appliances and users and provide more personalised service is still developing. For example, in the future, the refrigerator can be more than a place to store food, but able to track users' intake preference/pattern and use such data to monitor and optimise food purchases. Construction of smart home systems rather than a single smart appliance can be more difficult, which requires a unified platform to relate to all the appliances, collect big data, analyse the data and then react. However, it is also more rewarding. The platform, once established, occupies the front-most end to interact directly with a large number of users, resources providers, and their big data. In a smart home eco-system, such a platform will be the basic to incorporate all the appliances, yet at the same time it excludes other platforms (one home with two platforms makes no sense), thus, the first mover advantage is very obvious. Currently, the smart home system developer in China is mainly Haier U+ platform (Haier is also the only co-operator of Apple's Home Kit system). Midea Group also has its M- Smart system to roll out new smart home products. The smart appliances/smart home in China is still at an initial development stage Construction of a comprehensive smart home system is difficult but also rewarding, with the obvious first mover advantage China Home Appliances Sector 14

15 Figure 23: Example: Haier's U+ platform Source: Company data Haier has been investing in construction of its U+ platform for more than five years, and it's about to finish at end-14 or early-15. We expect Haier to enjoy the first mover advantage compared to other home appliance manufacturers. Figure 24: Example: Haier's U+ platform profit model Source: Company data China Home Appliances Sector 15

16 In our view, the current development of smart appliances and smart home system is at its initial stage. There are some issues in smart appliances/home system development that obstruct it from getting great popularity: Relatively high price; The need to be designed and pre-installed during home decoration, so smart home system might be limited in the high-end villa market at an initial stage; The smart appliances/smart home may face challenges in pricing, installation, standard setting and userfriendliness No unified technological standard has been set for the smart appliances, and there is difficulty in making the smart appliances produced by different manufacturers compatible with each other; The interface of smart appliances depends heavily on high-tech mobile/internet/tv, which is not user-friendly enough for general public, especially for the elderly. China Home Appliances Sector 16

17 Most/least-favoured subsectors Among the six subsectors (Figure 25), we favour: (1) small appliances (a 15.7% three-year sales value CAGR in E on low penetration and rapid lifestyle change); (2) air conditioners (especially an 18.6% CAGR for central AC on high entry barriers from R&D requirement and increasing application in infrastructure and households); and (3) washing machines (recovering to an 8.8% CAGR from a low 3.2% CAGR over the past three years). We dislike the TV subsector, whose growth has decelerated to a negative 3% CAGR from 1% in the past three years, mainly because of high penetration of over 12% on average. We believe only leaders may survive and gain market share in the TV subsector, as smaller players may lose market share to bigger ones due to disadvange in pricing power and new product development. We expect subsector leaders to continuously benefit from the economies of scale, product upgrade and margin enhancement going forward. Prefer small appliances, AC and washing machine over refrigerator and TV Figure 25: China home appliance subsector's growth forecast (%) Residential AC Central AC Refrigerator Washing machine TV Small appliances and others Historical 3-year CAGR (211-13) Forecast 3-year CAGR (214-16E) Source: CMM, China IOL, DisplaySearch, Credit Suisse estimates Figure 26: ASP YoY growth for key subsectors (%) Figure 27: Sales volume YoY growth for key subsectors (%) E 215E 216E E 215E 216E Residential AC Refrigerator Washing machine TV Residential AC Refrigerator Washing machine TV Source: CMM, China IOL, DisplaySearch, Credit Suisse estimates Source: CMM, China IO, DisplaySearch, Credit Suisse estimates China Home Appliances Sector 17

18 Small appliances: 15.7% 3Y CAGR for E We expect the small appliances market to realise a 15.7% three-year sales value CAGR in E on low penetration and rapid lifestyle changes. According to China Market Monitor, most small appliances, including kitchenware, are expected to grow double digits in 214E, with water purifiers (+75.5% YoY) and air purifiers (+81.9% YoY) taking the lead on rising awareness of safety and health, followed by food processors (+18.3% YoY) and ventilator (+16.% YoY). We expect small appliance sales to benefit from: Expect small appliances to see a 15.7% CAGR in E, with water/air purifiers taking the lead Low penetration of small appliances compared to large appliances We found penetration of small appliance products in China (Figure 28), either in urban or rural areas, is much lower than that of large appliances (Figure 29), which implies that there is plenty of room for growth for small appliances in both the rural and urban areas, especially with the urbanisation process and income growth. Figure 28: Small appliance penetration in China 14 Figure 29: Large appliance penetration in China Induction cooker Microwave oven Ventilator Water dispenser Soybean milk machine Color TV AC Refrigerator Washer Urban Rural Urban Rural Source: NBS, as of 212 Source: NBS, as of 211 Changes in lifestyle result in strong product demand for small appliances Moreover, we believe the sales growth of some small appliances is a reflection of changing lifestyle and living environment. For example, market demand for air and water purifiers has been significant over the past few years, with 7M14 domestic sales volume for air and water purifiers growing strongly at 81% and 38% YoY, respectively, according to China IOL. We expect the high growth trend to continue in the next few years with the rising consumer awareness of water quality, air pollution in China and personal health. China Home Appliances Sector 18

19 Figure 3: Air purifier sales volume growth Figure 31: Water purifier sales volume growth (mn units) (mn units) 4 8% 4 7% 7% 6% 3 2 6% 5% 4% 3% 3 2 5% 4% 3% 1 2% 1 2% 1% 1% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 % Domestic Export YoY chg - RHS Domestic Export YoY chg - RHS Source: China IOL Source: China IOL Air conditioner: Central AC taking the lead The central AC market is expected to grow even faster at an 18.6% CAGR mainly driven by the infrastructure construction in China, including malls, office buildings, urban subways, etc., as well as extensive application and increasing penetration of commercial ACs in these places. Domestic brands may outgrow international brands in the next few years due to a low base and after sales service, as long as they are comparable to international brands in terms of quality and technology. Central AC should be the driving force in AC sector growth with a 18.6% CAGR for E Figure 32: Market share of major central AC brands by value (1H14) York 6.9% Others 21.9% Carrier 4.7% Trane 2.9% McQuay 5.2% 4 big western brands 19.7% Haier 4.% Daikin 14.4% Chinese brands 34.5% Midea 14.4% Toshiba 2.6% Japanese brands 23.9% Hisense Hitachi 6.9% Gree 16.1% Source: Central AC Business Information by Changzhou Aircon Internet Ad Co. We believe the residential AC market is likely to achieve stable growth of 1.4% for E, because its penetration still has room to improve, especially in the rural areas (with a low penetration rate of only 25% in 212, according to NBS). Even in the urban areas, we believe the current penetration rate (127% in 212) does not imply a saturated market, because there could be one residential AC per room or multiple ones per household. We expect a stable 1.4% CAGR for E in the residential AC market China Home Appliances Sector 19

20 Figure 33: Residential AC sales volume (mn units) (%) 12 5 Figure 34: Residential AC total market share by volume (213) Others 18% Changhong 2% TCL 4% Hisense Kelon 5% Gree 35% 2 Chigo 5% M14 Domestic Export Total YoY chg - RHS -1 Haier 7% Midea 24% Source: China IOL Source: China IOL Washing machines: Improve to an 8.8% 3Y CAGR We expect the washing machine market to achieve an 8.8% three-year sales value CAGR in E vs. a low 3.2% CAGR over the past three years. We believe lifestyle changes could be the main driver of washing machine growth in the future, although the penetration rate (98.% in urban and 67.2% in rural in 212, according to NBS) is already high under the current mainstream usage of washing machines. The sector's growth may come from demand for clothes dryer, either separate (which leads to more volume growth and higher penetration), or combined with washer (which results in upgrade demand). The future growth may also come from increasing demand for new product design and functions, such as Haier's self-cleaning technology or Midea (Little Swan)'s detergent accurate delivery technology, which became very popular among customers upon launch. Lifestyle changes to drive washing machine growth, e.g., increasing demand for dryers and new product functions Figure 35: Washing machines total sales volume (mn units) (%) M14 Domestic Export Total YoY chg - RHS Source: China IOL Figure 36: Washing machine total market share by volume (1H14) CMM Samsung 2.6% TCL 3.% LG 3.7% Electrolux 3.9% Midea 4.7% Siemens 6.6% Others 14.% Panasonic 7.% Sanyo 14.% Source: China Market Monitor, Haier Electronics Haier 26.7% Little Swan 13.8% China Home Appliances Sector 2

21 Wrong perceptions weighing on valuation The key players in the China home appliances sector are trading at 8.8x 215E P/E, with a 17% three-year earnings CAGR. We believe the sector as a whole is undervalued, given some wrong perceptions by the market on technology entry barriers, sector's growth potential, customer behaviour and preferences, as well as opportunities and risks from fast-growing e-commerce development. We believe the steady ASP growth and attractive new product functions are a solid proof that the home appliances market is not a low tech commodity business without growth. On the contrary, product upgrade will be a key differentiation factor for leading industry players. Misperception 1: Low tech commodity business Some may see the home appliances industry as a low-tech commodity business. However, in our view, this is not the case, especially for the leading players and in the white goods subsector. We believe the misperception was likely due to some low-end participants in home appliances manufacturing, especially related to black appliances such as TVs and DVD, or some even refer to the digital and handset products manufacturers under a wider gambit of consumer appliances. The small players are those that usually do just assembly work, while for many subsector leaders in home appliances, especially white goods, the product design and reliability are of crucial importance which can't be achieved merely by the assembly line. We believe there are misperceptions on technology entry bariers, growth, customers and e- commerce Low-end small participants that only do assembly work result in the misperception of low technology entry barriers Figure 37: Consumer appliance retail sales by major product category (1H14) IT, digital 13% Others 8% Large white appliances 23% Figure 38: Consumer appliance retail sales by major product category (1H14) cont'd (Rmb bn) % 1% 15 Black appliances 11% % -1% Telecom 3% Source: China Market Monitor Household appliances 5% Kitchenware 1% Large Black white appliances appliances Kitchen ware Sales value (Rmb bn) Source: China Market Monitor Take Gree for example, the biggest air conditioner manufacturer in China in terms of sales volume and value; it launches new products every year to improve product functions and efficiency. Its R&D efforts have been recognised nationally with key technologies enrolled in national programmes/awards. Household Telecom IT, digital Others appliances YoY (RHS) -2% However, leaders like Gree actually focus heavily on tech upgrade, product design and reliability China Home Appliances Sector 21

22 (Rmb/unit) 24 October 214 Figure 39: Gree's new technologies enrolled in national key technology programs ( 纳入国家科技计划项目 ) National projects/awards # Name of technology Time National 863 Programme 1 Variable Refrigerant Flow Multi-VRF System Based on MIMO Control 28 2 Research of Indoor Communication Transmission Technology and Development of 211 Intelligent Electric Appliances National Key Technology R&D Programme 3 High-efficiency Water-cooled Centrifugal Chiller (Water Outlet Temperature ) 25 4 Integration and Application of Green Manufacturing Technology of Guangdong 211 Advanced Household Appliances National New Products Programme 5 Digital Ultra-low Temperature Air Source Heat Pump Scroll VRF System 26 6 EVI Intelligent Defrosting Floor-standing AC with Sliding Door Design 27 7 LSBLX7M Magnetic Suspension DC Inverter Centrifugal Chiller 28 8 DC Inverter VRF Water Heater 21 9 Super-high Efficiency Fixed-speed Compressor with Monophase Asynchronous 211 Permasyn Motor 1 Two-stage high-efficiency permanent-magnet synchronizing inverter centrifugal chiller 213 LSBLX65SVE National Torch Programme 11 Heat Recovery Digital Multi VRF System 27 National Key Technology Achievement Transformation Programme National Key Industries' Development and Technology Renovation Programme Pilot Project - Solar Power Photoelectric Construction Special Fund for Deep Integration of Information and Industrialisation Source: Company data, Credit Suisse National Torch Program (development on sine wave driven inverter air 28 conditioner) 13 Development on New G-Matrik Inverter Air Conditioner Heat Recovery DC Inverter Modular Multi VRF System High-Efficiency and Energy-saving R41A DC Inverter Compressor Gree MR Series 5-mode Heat Recovery Modular Units Photoelectric Solar Power DC Inverter Air Conditioner Super-high Efficiency and Energy-saving Air Source Heat Pump Water Heater Development and Industrialization of Gree R29 Eco-friendly Air Conditioner Technology Achievement Transformation of "Research and Appliance of Inverter Air 212 Conditioner Key Technology" 21 Industrialization Program of Large-scale Refrigerating Compressor Application Program (first phase) of Solar Power Photoelectric Construction Gree Intelligent Integrated Information System 212 For leading players with innovation and original technologies, their high-end products continuously bring up product mix and ASPs, despite fluctuations in raw material costs. Figure 4: Average unit price of home appliance products 4, 3,5 3, 2,5 2, 1,5 1, 5 Color TV Refrigerator Washing machine 25 ASP 213 ASP 8 Year CAGR (RHS) Source: China Market Monitor AC 9% 8% 7% 6% 5% 4% 3% 2% 1% % Figure 41: Sector ASP estimate (%) E 215E 216E Residential AC Refrigerator Washing machine TV Source: CMM, China IOL, DisplaySearch, Credit Suisse estimates China Home Appliances Sector 22

23 (Rmb bn) % 24 October 214 Figure 42: Gree's AC ASP increasing (Rmb) (%) 3, 15 Figure 43: Haier's product ASP increasing (Rmb) 2,5 2,5 2, 2, 1 1,5 1,5 1, 5 1, E 215E 216E E 215E 216E ASP YoY chg - RHS Washing machines Refrigerators Air conditioners Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Misperception 2: Low or no growth The market size of the sector continues to grow. In 26-13, the CAGR of the consumer appliances market size was 1.1%, according to China Market Monitor. In 214, the overall market size is expected to grow 6.4% YoY, and some subsectors like air/water purifiers should experience even faster growth thanks to consumers' consciousness of health issues. More importantly, profitability of the market players has been improving with PBT margins increasing from 2.5% in 26 to 6.1% in 213. This suggests product upgrade and mix improvement, increasing operating efficiency and enhancement of the distribution network, which we believe will be key market growth drivers, rather than simply volume growth. Home appliance sector still has growth momentum, and, more importantly, room for improving profitability Figure 44: China consumer appliances market size 1,6 1,4 1,2 21% 16% 11% Figure 45: Profitability of home appliances manufacturing , 6% % % E -9% M14 Market value (Rmb bn) YoY (RHS) PBT margin GP margin Source: China Market Monitor Source: NBS, Credit Suisse estimates Misperception 3: Consumers don't upgrade, and they use one item for ten years Consumers' expenditure on home appliances has been increasing with income levels, which is the major driving force of consumer upgrade needs from the demand side. China Home Appliances Sector 23

24 Figure 46: Annual urban income/exp per capita YoY 25% 2% 15% 1% 5% Figure 47: Annual rural income/exp per capita YoY 35% 3% 25% 2% 15% 1% 5% % % Annual urban disposable income per capita YoY Annual rural cash income per capita YoY Annual urban consumption exp per capita YoY Annual rural cash consumption exp per capita YoY Annual urban household facilities exp per capita YoY Annual rural household facilities exp per capita YoY Source: NBS, Credit Suisse Source: NBS, Credit Suisse From the supply side, home appliance-makers continue to launch new products with more advanced functions and fancier designs to "create" new demand. Besides, changes in customer preferences and behaviour are more frequent and more rapid nowadays. It usually signals a formation of new trend, and if captured timely, can be an opportunity to create new demand. New design and function create new demand Figure 48: Midea IH intelligent rice cooker Figure 49: Robam kitchenware set Source: Company data Source: Company data Misperception 4: Loser to the e-commerce threat This is certainly not the case as e-commerce provides another distribution channel for home appliance manufacturers which supports growth of market size of the whole sector as it helps enhance the interaction between customers and manufacturers, as well as information flow and comparison. Online sales of home appliances witnessed a fast 61% CAGR over 26-1H14. It accounted for 12% of total home appliance sales by 1H14, according to China Market Monitor. Based on another report by Xinhuanet and MIIT, among large home appliance items, TV had the highest online penetration rate of 15.% in 1H14, while air conditioners the lowest at 1.5% (probably due to more complex installation requirement). We believe e-commerce provides an effective distribution channel China Home Appliances Sector 24

25 Figure 5: Home appliance online vs offline (1H14) Total Rmb349.3 bn, -.2% YoY Online 12% Online Rmb4.5 bn, +62% YoY Figure 51: China's online/offline sales value of consumer appliances from 26 to 213 (Rmb bn) 1,6 9.7% 1,4 Online CAGR=61% 1,2 1, Offline Rmb38.8 bn, -5% YoY Offline 88% % 9.3% Offline CAGR=9% 99.3% Offline Online Source: China Market Monitor Source: China Market Monitor Figure 52: Online sales percentage (1H14) Figure 53: 1H14 online sales value for consumer appliances 16% 15.% 45 9% 14% 12% 13.% 12.3% 1.5% % 7% 6% 1% 25 5% 8% 2 4% 6% 4% % 2% 1% 2% % Flat TV Refrigerator Washing machine AC Big appliances Small appliances Mobile phone Sales value (Rmb bn) YoY (RHS) % Source: Xinhuanet, MIIT Source: China Market Monitor, Credit Suisse estimates As for the sales channel, interestingly, JD and Tmall dominate online sales of consumer appliances (including handsets), accounting for 9% of total online sales in 1H14, each at 58% and 32% of total, respectively (shown in Figure 55). If we refer to large home appliance online sales alone, JD and Tmall accounted for 62% and 23%, respectively. China Home Appliances Sector 25

26 Figure 54: Consumer appliance online sales breakdown Figure 55: Consumer appliance online sales channel Total Rmb83 bn, +56.6% YoY Others Rmb3.4 bn Large appliances Rmb23 bn, +67% YoY Others 1% Tmall 32% JD 58% Mobile phone Rmb4.6 bn, +35% YoY Small appliances Rmb16 bn, +8% YoY Source: Xinhua Net, MIIT, as of 1H14 Source: Xinhua Net, MIIT, as of 1H14 We believe there is a growing trend for online sales of home appliance products because many consumers now show a high tendency to purchase online, as indicated in a survey by CCW Research (Figure 56). Time saving, low price and easy comparison are the most mentioned reasons for choosing online channel. We believe such a switch from offline to online will bring new challenges as well as opportunities for manufacturers, which may result in revolutionary changes in production process, distribution and promotion, logistics and services. We prefer companies with effective measures and management commitment to adapt to fast growth of online sales, such as QD Haier and Midea Group. We prefer QD Haier and Midea Group as they adapt to fast growth of online sales Figure 56: Distribution channels favoured by consumers Figure 57: Reasons for shopping home appliances online Home appliance shopping malls (Gome, Suning, etc) 71.1% Time saving 75.9% E-commerce platforms (JD, Tmall, etc) 54.4% Lower price 68.1% Traditional offline electronic shops 39.7% Hypermarkets 19.5% Easy comparison 52.5% Brands' websites 11.8% More choices 24.1%.% 2.% 4.% 6.% 8.%.% 2.% 4.% 6.% 8.% Source: CCW Research, as of August 213 Source: CCW Research, as of August 213 In our view, the 8.8x 215E P/E, with a 17% three-year earnings CAGR for key players in the home appliances sector we cover is unjustified, and a correction of the abovementioned misunderstandings will cause a re-rating of the sector, especially for the leading players with an increasing market share, strong profitability, and great growth potential. We believe a correction of misperceptions should cause a sector re-rating China Home Appliances Sector 26

27 Top picks: QD Haier, Midea and Gree We believe the segment leaders, who have a differentiating product portfolio, a reputable brand name, solid execution, strong R&D capability, and speedy response to new industry trends, would stand out from peers. Among the 5+ home appliance companies listed in the A-share market and Hong Kong, we initiate coverage on QD Haier, Midea Group, Gree, Hisense Electric, TCL Corp, Skyworth and Hisense Kelon with OUTPERFORM ratings, due to their leadership positions in their respective subsectors, stable or strong earnings growth and low valuation multiples (average 8.8x 215E P/E). We prefer segment leaders, which trade at discounted valuation but with promising growth potential Our top picks for the sector are QD Haier, Midea Group and Gree: (1) we like QD Haier for its stable growth, healthy financial position (net cash = 53% market cap), and potential asset injection from parentco which may bring 17% earnings upside potential based on our estimates; (2) for Midea Group, we like its diversified portfolio and fast-growing small appliance business, product mix and margin improvement, as well as its share repurchase plan for management incentives; and (3) for Gree, we like its strong R&D in the AC market and rich cash on hand (net cash = 41% market cap). Our valuation basis is forward price-to-earnings multiple and our valuation base year is 215E. Our top picks for the sector are Qingdao Haier, Midea Group and Gree. We base our valuation on 215E P/E We like Qingdao Haier for its leadership position in white appliances, management's strategic vision and commitment, and potential asset injection from parentco. For Midea Group, we like its diversified portfolio and fast-growing small appliances business, margin improvement, as well as its share repurchase plan for management incentives. For Gree, we like its strong R&D and No.1 market share in the AC market, which is unjustified with its depressed valuation. Figure 58: Rating, target price, and valuation method 5-yr Hist. Net Market Price Target Pot. Target avg avg Target P/E 3Y CAGR cash cap (loc (loc upside CS price fwd fwd PEG PEG (x) earnings EPS to MC Name Ticker (U$ mn) curr) curr) (%) rating multiple P/E P/E (x) (x) CY14E CY15E CY16E (%) (%) (%) Qingdao Haier 669.SS 7, O Midea Group 333.SZ 14, O Gree 651.SZ 13, O Haier Electronics 1169.HK 7, O Hisense Electric 66.SS 2, O TCL Corporation 1.SZ 4, O n.a. Skyworth Digital 751.HK 1, O n.a. Hisense Kelon - A 921.SZ 1, O Simple average Weighted average Source: Company data, Credit Suisse estimates China Home Appliances Sector 27

28 Figure 59: Ranking of market share in home appliances subsectors Washing Water Small AC machine Refrigerator heater TV appliances Logistics Qingdao Haier #3 #1 #1 #1 Goodaymart Midea Group #2 #2 #6 #2 #1 Ande Gree #1 Haier Electronics #1 #1 Goodaymart Hisense Electric #1 TCL Corporation #3 Skyworth Digital #2 Hisense Kelon #4 #2 Note: Goodaymart is also known as RRS (the initials of its name in Chinese). Source: CMM, China IOL, DisplaySearch, Credit Suisse estimates. Investment recommendations Our top picks for the sector are Qingdao Haier, Midea Group and Gree. Qingdao Haier (669.SS). We initiate coverage on Qingdao Haier with an OUTPERFORM rating and a target price of Rmb22.. We like Qingdao Haier's leadership position in the white appliances sector, management's strategic vision and commitment, stable growth and healthy financial position (net cash = 53% market cap), as well as potential asset injection and M&A opportunities. We expect to see: (1) stable growth from white appliances manufacturing, especially driven by fast-growing air conditioner sales; and (2) new business initiatives in logistics, e-commerce and O2O platform. We see potential asset injection within 15 months to be the key catalyst which may bring earnings upside equivalent to 17% of 215E net profit based on our assumptions. Our target price of Rmb22. is based on a target 12.x 215E P/E (or target stub P/E of 1.8x), at a premium to key industry players' five-year average forward P/E of 11x due to its leadership position and potential asset injection. Midea Group (333.SZ). We initiate coverage on Midea Group with an OUTPERFORM rating and a target price of Rmb3.. We like Midea's product portfolio diversification, exposure to the fast growing small appliances market, product mix and margin improvement, as well as management's commitment and e-commerce strategy. We believe Midea Group will benefit from: (1) strong R&D and new product development; (2) a well-diversified small appliances portfolio; and (3) commitment to new industry trends, such as its smart home system M-Smart and e-commerce development. Catalysts include strong EPS growth and share repurchase plan. Our target price of Rmb3. is based on a target 1.x 215E P/E, at a discount to key industry players' five-year average forward P/E of 11x due to a lack of track record. Gree (651.SZ). We initiate coverage on Gree with an OUTPERFORM rating and a target price of Rmb39.. We like Gree's leadership position in the AC market, strong R&D capabilities and strong financial position (net cash = 41% market cap), which is unjustified by the current low valuation multiple. Gree has strong R&D capabilities, and its No.1 position in the AC market helps it maintain higher margins than peers. The main catalyst is an overhang on parentco's shareholding change to be removed. Our target price of Rmb39. is based on a target 8.x 215E P/E, at a discount to key industry players' five-year average forward P/E of 11x, but in line with its own five-year average forward P/E. Haier Elec (1169.HK). We maintain our OUTPERFORM rating on Haier Elec with a target price of HK$25.5. We believe ICS is a key growth driver for Haier Elec. We expect the third party distribution business to deliver a decent revenue CAGR of 32% on network expansion and Goodaymart (RRS) platform expansion. Its third party logistics business is expected to benefit from the strategic cooperation and M&As. The China Home Appliances Sector 28

29 stock is trading at 15.6x 215E P/E. Our target price of HK$25.5 is based on a 19.1x SOTP-implied 215E P/E. Hisense Electric (66.SS). We initiate coverage on Hisense Electric with an OUTPERFORM rating and a target price of Rmb13.. We like the company as a consolidator in the domestic market with high product quality and innovation, and an explorer in overseas market transitioning from an OEM/developing market to an original branding/developed market. Its TV products are characterised by high quality and innovative features, with R&D expense accounting for c.4% of net revenue, the highest among traditional TV-makers. Its LCD TV global market share increased to 5.6% in 1Q14 from 5.% in 1Q13, with even better performance in the 4K/big screen TV market. Catalysts for the stock include improving profitability in the export market and increasing smart TV penetration. Our target price of Rmb13. is based on 11.x 215E P/E, generally in line with key industry players' five-year average forward P/E of 11x. TCL Corporation (1.SZ). We initiate coverage on TCL Corporation with an OUTPERFORM rating and a target price of Rmb3.6. We like growth of TCL's CSOT unit and mobile business, which should become the new drivers of future growth, although the growth of its TV business decelerates amid fierce competition. For CSOT, we estimated it should contribute 18-27% of total revenue. Its EBIT contribution should be even higher, with 29-4% of total in E, at a three-year EBIT CAGR of 39%. For telecoms, we estimate it should account for 24-3% of total revenue, and 36-4% EBIT (at a three-year EBIT CAGR of 24%) in E as its smartphone business rises from a relatively low base. Catalysts for the stock include gradual ramping up of panel production capacity and growth of the smartphone industry. Our target price of Rmb3.6 is based on 12.5x 215E P/E, at a premium to key industry players' five-year average forward P/E of 11x, due to its high growth potential from vertical integration. Skyworth (751.HK). We initiate coverage on Skyworth with an OUTPERFORM rating and a target price of HK$5.. We like Skyworth as one of the leading TV brands in China with an extensive sales network in Tier 3/4 cities and rural areas. For FY3/15, we believe TV shipments should be stable with product mix upgrade. The catalysts include: (1) faster-than-expected shipment growth in 2H FY3/15; and (2) stronger revenue growth in non-tv businesses, especially for the white appliances business. Our target price is based on 8.5x adjusted CY15E P/E, at a discount to key industry players' five-year simple average fwd P/E of 11.1x, due to fierce competition and subdued growth in the TV sector. Hisense Kelon (921.SZ). We initiate coverage on Hisense Kelon with an OUTPERFORM rating and a target price of HK$1.7. We like Hisense Kelon's recovery story with greater growth potential compared to its peers. The recovery is on track with the air conditioner business being the main driver. We estimate that air conditioners will account for 47%/54% of revenue/gp in 215E from 38%/39% in 213 on the back of (1) volume increase and (2) margin expansion due to product mix improvement. We expect Hisense Kelon 's revenue to grow at 11-13% and recurring earnings to grow at 22-31% in E, higher than our forecast 3-1% market size three-year CAGR for refrigerators and ACs. Our target price of Rmb1.7 is based on 1.5x 215E P/E, at a discount to key industry players' five-year average forward P/E of 11x, due to a lack of track record since its recovery. China Home Appliances Sector 29

30 Key assumptions by product Air conditioners Figure 6: ASP assumption for air conditioners Rmb E 215E 216E Gree 2,75 2,22 2,482 2,66 2,71 2,792 YoY % Midea Group 2,75 1,958 2,57 2,14 2,24 2,27 YoY % Qingdao Haier 1,818 1,984 2,11 2,152 2,195 2,239 YoY % Hisense Kelon 1,673 1,563 1,778 2,187 2,34 2,457 YoY % Source: Credit Suisse estimates Figure 61: Sales volume assumption for air conditioners mn units E 215E 216E Gree YoY % Midea Group YoY % Qingdao Haier YoY % Hisense Kelon YoY % Source: China IOL, Credit Suisse estimates Figure 62: Geographic sales volume breakdown for air conditioners mn units M14 Domestic Gree YoY % Midea Group YoY % Qingdao Haier YoY % Hisense Kelon YoY % Export Gree YoY % Midea Group YoY % Qingdao Haier YoY % Hisense Kelon YoY % Export % of total Gree Midea Group Qingdao Haier Hisense Kelon Source: China IOL China Home Appliances Sector 3

31 Refrigerators Figure 63: ASP assumption for refrigerators Rmb E 215E 216E Qingdao Haier 1,558 1,477 1,57 1,567 1,614 1,647 YoY % Midea Group 1,96 1,16 1,226 1,385 1,44 1,498 YoY % Hisense Kelon 1,13 1,17 1,168 1,186 1,222 1,264 YoY % Source: Credit Suisse estimates Figure 64: Sales volume assumption for refrigerators mn units E 215E 216E Qingdao Haier YoY % Midea Group YoY % Hisense Kelon YoY % Source: China IOL, Credit Suisse estimates Figure 65: Geographic sales volume breakdown for refrigerators mn units M14 Domestic Qingdao Haier YoY % Midea Group YoY % Hisense Kelon YoY % Export Qingdao Haier YoY % Midea Group YoY % Hisense Kelon YoY % Export % of total Qingdao Haier Midea Group Hisense Kelon Source: China IOL Washing machines Figure 66: ASP assumption for washing machines Rmb E 215E 216E Qingdao Haier ,17 1,46 1,85 1,127 YoY % Midea Group ,27 1,79 YoY % Source: Credit Suisse estimates China Home Appliances Sector 31

32 Figure 67: Sales volume assumption for washing machines mn units E 215E 216E Qingdao Haier YoY % Midea Group YoY % Source: China IOL, Credit Suisse estimates Figure 68: Geographic sales volume breakdown for washing machines mn units M14 Domestic Qingdao Haier YoY % Midea Group YoY % Export Qingdao Haier YoY % Midea Group YoY % Export % of total Qingdao Haier Midea Group Source: China IOL Televisions Figure 69: ASP assumption for TVs ASP (Rmb) E 215E 216E Hisense Electric 2,277 2,24 2,294 2,294 2,294 2,294 YoY % Skyworth * 2,566 2,523 2,46 2,491 2,527 2,486 YoY % TCL Multimedia 1,787 1,66 1,68 1,68 1,68 1,68 YoY % *Note: FY3/12-FY3/17E for Skyworth. Source: Company data, Credit Suisse estimates Figure 7: Sales volume assumption for TVs Sales volume E 215E 216E Hisense Electric YoY % Skyworth * YoY % TCL Multimedia YoY % *Note: FY3/12-FY3/17E for Skyworth. Source: Company data, Credit Suisse estimates China Home Appliances Sector 32

33 Figure 71: Geographic sales volume breakdown for TVs YTD** Domestic Skyworth * YoY % TCL Multimedia YoY % Export Skyworth * YoY % TCL Multimedia YoY % Export % of total Skyworth & TCL Multimedia *Note: FY3/12-FY3/14 for Skyworth. ** 214 YTD represents nine months as of September for TCL Multimedia and six months as of September for Skyworth. Source: Company data Target price and valuation Our valuation basis is forward P/E multiple and our valuation base year is 215E. Figure 72: Rating, target price, and valuation method 5-yr Hist. Market Price Target Pot. Target avg avg Target P/E 3Y CAGR cash cap (loc (loc upside CS price fwd fwd PEG PEG (x) earnings EPS to MC Name Ticker (U$ mn) curr) curr) (%) rating multiple P/E P/E (x) (x) CY14E CY15E CY16E (%) (%) (%) Qingdao Haier 669.SS 7, O Midea Group 333.SZ 14, O Gree 651.SZ 13, O Haier Electronics 1169.HK 7, O Hisense Electric 66.SS 2, O TCL Corporation 1.SZ 4, O n.a. Skyworth Digital 751.HK 1, O n.a. Hisense Kelon - A 921.SZ 1, O Simple average Weighted average Source: Company data, Credit Suisse estimates We initiate coverage on QD Haier with an OUTPERFORM rating and TP Rmb22. Our target price of Rmb22. (implying 42% potential upside) is based on a target 12.x 215E P/E (or target stub P/E of 1.8x), at a premium to key industry players' 5-year average forward P/E of 11x due to its leading position. The implied target PEG of 1.x is lower than key players' average PEG of 1.1x, suggesting our valuation is not demanding given the company's earnings growth potential. We initiate coverage on Midea Group with an OUTPERFORM rating and TP Rmb3. Our target price of Rmb3. (implying 47% potential upside) is based on a target 1.x 215E P/E, at a discount to key industry players' 5-year average forward P/E of 11x due to lack of track record. The implied target PEG of.4x is largely lower than key players' average PEG of 1.1x, suggesting our valuation is not demanding given the company's earnings growth potential. We initiate coverage on Gree with an OUTPERFORM rating and TP Rmb39.. Our target price of Rmb39. (implying 42% potential upside) is based on a target 8.x 215E P/E, at a discount to key industry players' 5-year average forward P/E of 11x, but Net China Home Appliances Sector 33

34 in-line with its own 5-year average forward P/E. Its implied target PEG of.5x is largely lower than key players' average PEG of 1.1x, suggesting our valuation is not demanding given the company's earnings growth potential. We reiterate our OUTPERFORM rating on Haier Electronics Our target price of HK$25.5 (unchanged) is based on a 19.1x SOTP-implies 215E P/E. Its implied target PEG at 1.3x is slightly higher than key players' average PEG of 1.1x, as its EPS growth should be dragged down by exercise of share options/warrants compared to earnings growth. Based on earnings CAGR of 17.8% in E, we estimate an adjusted PEG should be 1.1, in line with key players' average. We initiate coverage on Hisense Elec with an OUTPERFORM rating and TP Rmb13. Our target price of Rmb13. (implying 18% potential upside) is based on 11.x 215E P/E, generally in line with key industry players' 5-year average forward P/E of 11x. The implied target PEG of 4.1x is higher than key players' average PEG of 1.1x, which is justified by the company's leading position in the industry. We initiate coverage on TCL Corp with an OUTPERFORM rating and TP Rmb3.6 Our target price of Rmb3.6 (implying 23% potential upside) is based on 12.5x 215E P/E, at a premium to key industry players' 5-year average forward P/E of 11x, due to its high growth potential from vertical integration. Its implied target PEG of 1.3 x is slightly higher than key players' average PEG of 1.1x, as its EPS growth should be dragged down by share placement compared to earnings growth. Based on earnings CAGR of 23.7% in E, we estimate an adjusted PEG should be.5, much lower than key players' average. We initiate coverage on Skyworth with an OUTPERFORM rating and TP HK$5. Our target price of HK$5. (implying 2% potential upside) is based on 8.5x adjusted CY15E P/E, at a discount to key industry players' 5-year average forward P/E of 11x, due to subdued growth in TV sector. Its implied target PEG of 1.1x is in line with key players' average PEG of 1.1x, suggesting our valuation is not demanding given the company's earnings growth potential. We initiate coverage on Hisense Kelon with an OUTPERFORM rating and TP Rmb1.7 Our target price of Rmb1.7 (implying 21% potential upside) is based on 1.5x 215E P/E, at a discount to key industry players' 5-year average forward P/E of 11x, due to lack of track record since its recovery. Its implied target PEG of.9x is lower than key players' average PEG of 1.1x, suggesting our valuation is not demanding given the company's earnings growth potential. China Home Appliances Sector 34

35 Investment risks Key investment risks include risks of the economic growth and an end-market demand slowdown, economic and regulatory/environmental policy changes, possible raw material and/or labour cost hikes, the failure in working capital control, corporate governance risks, and home appliances industry-specific risks. Risks of economic growth and end market demand We believe certain of China's macroeconomic-related factors and the potential risk of an economic growth slowdown are some of the key investment risks to the industry. The overall economic growth, the stability of residential property market, and disposable income growth would affect end-market demand for home appliances products and services. Should there be a slowdown in domestic economic activities or a sudden contraction in property transaction volumes, the performance of the industry would likely be adversely affected. Policy risks regarding energy saving, environmental protection, subsidy, etc China has experienced several rounds of multi-year household appliances supportive policies in recent years, mainly including the home appliances to the countryside, swapping old for new, and the energy-saving subsidy programme. Overall, these policies are favourable to the China household appliance industry and market players, by stimulating end-demand, safeguarding manufacturers from the export order tumbles post the global financial crisis, and inspiring upgrade to high technologically-advanced and environment-friendly models. However, the side effects of these policies also include preexhausting market demand, an intervening industry cycle, and hindering market consolidation. We believe any likely new policies focused on energy saving and environment protection (e.g., the widely speculated "Energy-saving Leader Plan") are the swing risks to the home appliances industry, since such programmes may affect market demand for certain products. In Figure 73, we have summarised a table for major policies related to home appliances subsidies over the past seven years. Macro investment risks include slowdown of economic growth and market demand, and policy risks. Figure 73: Home appliances subsidy programmes "Home appliances to the countryside" four years, related to sales of 3 mn units at Rmb72 bn Dec 7-Jan 13 Stage 1 (Dec 7-Nov 11) Stage 2 (Dec 8-Nov 12) Stage 3 (Feb 9-Jan 13) The rural consumers receive 13% of subsidy from the Central (8%) and local (2%) governments when they purchase the eligible household appliance products. Eligible categories include colour TV, refrigerator, handset, washing machine, air conditioner, water heater, computer, microwave oven, and induction cooker. Each category has a price cap. The policy kicked off in Shandong, Henan and Sichuan. Launched in another 14 provinces. Launched in the rest of the country. "Swapping old for new" 2.5 years, sales 92 mn units and Rmb34 bn May 9-Dec 11 China s State Council launched the Rmb2 bn old for new subsidy programme to encourage the replacement of old home appliances in urban areas. Buyers who sell five kinds of old home appliances (TVs, refrigerators, washing machines, air-conditioners and personal computers) to government-designated dealers and purchase new ones will receive a subsidy equal to 1% of the sales price of the new appliances. Each category has a subsidy cap (maximum Rmb25-4/unit). Subsidy program for energy-saving appliances 3 years, sales 115mn units and Rmb4bn in total Jun 9-May 11 Subsidy for energy-saving AC, firstly Rmb3-85/unit, then reduced to Rmb15-25/unit from Jun 21 till 211, nationwide. Jun 12-Jun 13 China State Council launched the energy-saving consumption subsidy programme. Consumers who buy eligible energy-saving products within five types of home appliances TV, air conditioner, washing machine, water heater and refrigerator (aggregate subsidy amount ~Rmb26.5 bn), and energy-saving vehicles, LED lighting and electric motors (aggregate subsidy amount ~Rmb9.8 bn) will get subsidized of Rmb7-55/unit. Source: NBS, Credit Suisse estimates China Home Appliances Sector 35

36 Risks from costs, such as raw materials and labour Cost control is an essential risk factor given that the traditional household appliances retailing and marketing models face more challenges from the booming of e-commerce and low price competition. For the home appliances manufacturing business, raw materials accounted for 6-9% of COGS. Therefore, the volatility in raw material prices, such as copper, is a potential risk to profitability. Labour cost is another key area to monitor, especially regarding the companies' production and sales team. Risks in company operations mainly include cost/working capital control Risks of working capital control Given the home appliances players' large retail networks, we believe working capital management is of essential importance for its sustainable development, especially the accounts receivable turnover and inventory turnover, not just for the company but also including the retail-end management by its franchisees. The failure in working capital control may jeopardize its cash flows and profitability. Risks related to corporate governance Cases of wrongdoing regarding corporate governance issues and consequent litigation and penalties could impair the companies' performance and image. We have summarized past cases as examples: (1) Skyworth: The former founder and chairman's fraud On 3 November 24, Skyworth s founder and former chairman Mr. Wong Wang Sang and his brother were detained by ICAC for conspiracy to steal from and defraud the company. They were sentenced for six years each on 13 June 26, and later were bailed out in 29. Skyworth s shares had been suspended for trading since 3 November 24. On 11 January 26 when the stock resumed trading, share price plummeted to HK$1.9, or a 6% decline. 6 December 24: Mr. Wong Wang Sang was re-designated from an executive director to a non-executive director of the company. He was non-executive chairman of the company. Mr. Wang Dianfu ( 王殿甫 ), an external electronic practitioner and industry celebrity, was appointed as CEO with effect from 7 December 24, who bailed Skyworth out from the turbulence. On 1 April 27, Mr. Wang Dianfu resigned as executive director and executive chairman of the Board due to age and health reasons. Currently, Ms. Lin Weiping (Mr Wong Wang Sang's spouse) is Executive Chairman of the Board (since 1 April 213). (2) Gree: Product call-back and lawsuit On 14 September 213, Gree announced to recall dehumidifiers sold in the US and Canada from January 25 to June 213. MJC (also called Soleus), a shareholder of US Gree, sued the company, seeking US$15 mn compensation for MJC S loss. The company hired professional lawyers to actively respond to the litigation. The company claimed that MJC s allegation had no merit and insisted to protect company s legal rights. The company expected the litigation to not affect its results. At present, the case is still in litigation, documents served and pre-trial preparation phase, and not yet ruled. Gree s share price had fallen 4.6% in the following week and rebounded quickly. Gree USA is a joint venture established by MJC America Holdings and Hong Kong Gree Electric Appliances Sales, Ltd. (1% owned by 651.CH); it became the exclusive US distributor of certain SoleusAir and other products manufactured by Gree Electric Appliances of Zhuhai China in 21. (3) Kelon: The accounting fraud and being subject to ST From October 24 to August 25, CSRC carried out an investigation into Kelon, and found out that Kelon had fraudulently increased its net earnings by Rmb12 mn, Rmb11 mn and Rmb15 mn from 22 to 24 by purposely overstating its revenue and underestimating receivables impairment and penalty payment in lawsuit. In addition, Kelon China Home Appliances Sector 36

37 had failed to disclose related party transaction with Green Cool, its largest shareholder. Kelon received an administrative penalty from the regulator of Rmb6,, and the company's top management also got fined Rmb35,. In 26, Kelon sued its former chairman Mr Gu Chujun and his firm, Green Cool and Green Cool's associates, for the embezzlement of funds. Mr Gu Chujun was then sentenced to ten-year imprisonment and a penalty payment of Rmb6.8 mn mainly on the misappropriation of company funds and fraudulent accounting. By August 213, Kelon had got the penalty payment of Rmb386 mn from Green Cool and Green Cool's associates, and recognised a c.rmb1 mn gain from the proceeds in 213 from the reversal of impairment of receivables. In July 27, the company's A shares were subject to "Special Treatment" (ST), due to negative earnings (ex one-offs) in the previous three years. The company was refrained from ST in April 213 due to improved profitability. Home appliances industry specific risks (1) Slowdown in replacement needs Given upgrade demand has a dominant role on the demand side of the home appliance industry, we believe a slowdown in replacement needs of the consumers, triggered by various factors like change in consumer sentiment, may affect the industry's growth negatively. (2) Threat from substitutes Home appliance products are difficult to get differentiated, and customer loyalty might be low if they can get a similar product at a lower price. And, worse still, substitutes from cross-sector emerge, e.g., mobile devices vs TV. Industry-specific risks mainly include a slowdown in replacement needs, threat from substitutes and price wars, environmental policies and issues, quality issues, and change in customer behaviour (3) Threat of price war from peers The home appliances industry, especially the air-conditioning sector, was renowned to refrain from the notorious price wars. However, Gree launched a special promotion campaign in the Golden Week of National Holiday in October 214, which was followed by other air conditioner-makers. We are concerned that if price wars from peers are initiated, it will impair the profitability and the image of the whole industry. (4) Environmental issues and policies China's energy-saving requirement for refrigerators has already reached the international standard. However, the requirement of other environmental parameters, like recyclability, and for other appliances, especially small appliances, may still have room for improvement compared to those in the developed countries. As people are more concerned about the environmental issues, more stringent policies and rules are likely to be launched in China and the overseas market. This will inevitably increase the cost of production and profitability of the whole industry. However, on the other hand, it will squeeze out the incompetent players and possibly accelerate the consolidation process of whole industry. (5) Quality issues Recalls of products with quality issues have been rare in the home appliances industry in China. However, as the home appliance-makers get more exposed to overseas markets, which in some countries have higher techincal or performance requirements than in China, they will face more challenges from overseas regulators with regards to quality issues, such as the lawsuit of Gree. Such issues will impair the companies' image and affect negatively their future growth. (6) Change in consumer behaviour Change in consumer behaviour is an essential risk factor for consumer product demand, especially for discretionary products like home appliances. Considering the fast transition of consumers' preference towards consumer goods and their easy access to various products via online platforms, we believe their change of behaviour, if cannot be captured China Home Appliances Sector 37

38 and responded by the home appliances providers rapidly enough, will cause a negative impact. (7) Other uncontrollable issues, such as weather Demand for air conditioners may be affected negatively by cooler weather in summer or warmer weather in winter. Such uncontrollable seasonal factors will affect the company's earnings, especially for the low-end producers with a limited product spectrum. Investment risks for companies under coverage We initiate coverage on QD Haier with an OUTPERFORM rating and TP Rmb22. Risks to our call include: (1) lower-than-expected white appliances growth in China which might cause growth deceleration of industry players, and intensify competition; (2) delay in asset injection from parentco Haier Group; (3) delay of new product development and customers' acceptance; (4) raw material cost pressure, e.g., fluctuation in copper and steel prices; and (5) unexpected more stringent environmental and quality requirement which will cause increased investment and costs, especially when the company is increasing its exposure to overseas market. We initiate coverage on Midea Group with an OUTPERFORM rating and TP Rmb3. Risks to our call include: (1) slower growth of white appliances in China which might could growth deceleration of industry players; (2) delay in new product development, especially for its small appliances segment; (3) fierce competition which would impair product ASP; (4) raw material cost pressure, e.g., fluctuations in copper and steel prices; (5) lower-thanexpected margins coming from ASP and cost pressure; and (6) unexpected problems in operational efficiency as there are too many different segments at different development stage in the company. We initiate coverage on Gree with an OUTPERFORM rating and TP Rmb39. Risks to our call 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 overseas exposure where policies and rules are more stringent; and (4) intensified competition and price war, as we noted that Gree just initiated a big promotion campaign in the Golden Week of National Holiday with other industry players following. We reiterate our OUTPERFORM rating on Haier Electronics Risks to our call include: (1) weaker-than-expected demand for washing machines and water heaters; (2) slow ramp up and execution risk for cooperation plans with Sinopec Marketing, which is still at an initial stage and requires lots of efforts from both sides to make it work; (3) slower-than-expected margin improvement for ICS; and (4) increased competition from other logistics service providers, especially from those also working in the e-commerce field. We initiate coverage on Hisense Elec with an OUTPERFORM rating and TP Rmb13. Risks to our call include: (1) slowdown of TV demand given the already high TV penetration rate in China, which will impair the industry player's growth; (2) fierce competition, especially from new entrants with a low price strategy to win market share first, which would pose the risk of initiating price wars; (3) raw materials pressure from fluctuations in panel and steel prices, especially as the pricing power of TV makers is relatively weaker than white appliances makers as the market concentration is lower; and (4) unexpected squeeze in profit margins from ASP and cost pressure. China Home Appliances Sector 38

39 We initiate coverage on TCL Corp with an OUTPERFORM rating and TP Rmb3.6 Risks to our call include: (1) production disruption and unstable final passed yield of CSOT T1 project, which was just ramped up to fully capacity; (2) unexpected delay of CSOT projects T2 and T3; (3) EPS dilution from share placement which is scheduled to happen in 214/15, but not yet fully expected and priced in by the market; (4) slowdown of TV demand, which will not only have negative impacts on its multimedia segment, but also on the profitability of its panel production (CSOT unit); and (5) slowdown of mobile phone demand, and fierce competition in low-to-middle end smart phone market. We initiate coverage on Skyworth with an OUTPERFORM rating and TP HK$5. Risks to our call include: (1) slowdown of TV demand; (2) fierce competition in TV segment, and loss of market share to existing or new players in the market; (3) delay in new product development and customer acceptance, esp for its new versions of cloud TVs; (4) monetization of its pilot Video-on-Demand program, and other smart appliances/application features; (4) raw material cost pressure, e.g., fluctuation in panel and steel prices; (5) over-reliance on single sector TV and lack of diversification; and (6) product quality and service issues. We initiate coverage on Hisense Kelon with an OUTPERFORM rating and TP Rmb1.7 Risks to our call include: (1) slowdown of home appliances demand; (2) delay in market share expansion in air conditioner segment given increasingly intensified competition and even price wars initiated by top players; (3) unexpected loss of refrigerator's market share esp in low-to-middle end market as increasing new entrants hope to get into this market; and (4) unexpected surge of raw materials cost and marketing expenses which should squeeze profit margins. China Home Appliances Sector 39

40 Appendix I: Company session Qingdao Haier (669.SS, OUTPERFORM, TP Rmb22.) Midea Group (333.SZ, OUTPERFORM, TP Rmb3.) Gree (651.SZ, OUTPERFORM, TP Rmb39.) Haier Electronics (1169.HK, OUTPERFORM, TP HKD25.5) Hisense Electric (66.SS, OUTPERFORM, TP Rmb13.) TCL Corp (1.SZ, OUTPERFORM, TP Rmb3.6) Skyworth (751.HK, OUTPERFORM, TP HKD5.) Hisense Kelon A (921.SZ, OUTPERFORM, TP Rmb1.7) China Home Appliances Sector 4

41 Asia Pacific / China Consumer Electronics Qingdao Haier Co., Ltd. Rating OUTPERFORM* Price (22 Oct 14, Rmb) 15.5 Target price (Rmb) 22.¹ Upside/downside (%) 41.9 Mkt cap (Rmb mn) 46,964 (US$ 7,676) Enterprise value (Rmb mn) 21,973 Number of shares (mn) 3,29.93 Free float (%) week price range ADTO - 6M (US$ mn) 43.6 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance Research Analysts Eva Wang eva.wang@credit-suisse.com 4 Price (LHS) Rebased Rel (RHS) Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 22/1/14 On 22/1/14 the spot exchange rate was Rmb6.12/US$ Performance Over 1M 3M 12M Absolute (%) Relative (%) (669.SS / 669 CH) INITIATION New business initiatives shape the future We initiate coverage with an OUTPERFORM rating and a Rmb22. target price, implying 42% potential upside. Qingdao Haier (QD Haier) is a Chinese white appliance conglomerate with presence in refrigerators (No.1 market share), ACs (No.3), washing machines (No.1) and water heaters (No.1), according to China Market Monitor. We like its new business initiatives, healthy financial position (214E net cash = 53% market cap), as well as potential asset injection. Stable traditional business plus new O2O initiatives. We expect to see: (1) stable growth from white appliances manufacturing, especially driven by fast-growing air conditioner sales; and (2) new business initiatives in logistics, e-commerce, O2O platform and smart home system development (U+ platform), which help bring suppliers and customers together from product design to after-sales services. Potential asset injection with around 17% earnings upside. We expect asset injection from parentco before January 216, including the minority stake held by parentco (e.g., 25% of refrigerator), overseas business (e.g., Fisher & Paykel and Sanyo in Japan and SE Asia) and other assets (e.g., TVs). If we assume the injection has a Rmb3 bn revenue (vs. parentco's Rmb18 bn revenue in 213), 4% net margins, and is completed at.5x P/S or Rmb15 bn (6% of its 214E net cash), earnings upside potential after deducting lost finance income will be around 17% of our 215E net profit, which we haven't factored in our earnings estimates. Valuation and investment risks. QD Haier is trading at 8.5x 215E P/E or an even lower stub P/E of 6.2x (based 215E stub earnings) if excluding the market valuation of its subsidiary, Haier Electronics. Our target price of Rmb22. (implying 42% upside potential) is based on a target 12.x 215E P/E (or target stub P/E of 1.8x), at a premium to key industry players' fiveyear average forward P/E of 11x due to its leadership position and potential asset injection. Risks to our call include lower-than-expected white appliances growth in China and a delay in asset injection from parentco. Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 86, , , ,353.1 EBITDA (Rmb mn) 6, , , ,138.6 EBIT (Rmb mn) 5, , , ,272.3 Net profit (Rmb mn) 4, ,922. 5, ,582.1 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. China Home Appliances Sector 41

42 Focus charts Figure 74: Gross revenue breakdown (213) Figure 75: Domestic market share (213) Non-core (%) business 1% 3 #1 ICS 19% Air conditioners 21% 25 #1 Equipment product 7% Small appliances 2% Water heaters 5% Washing machines 16% Refrigerators 29% # # Washing machines Refrigeratros Air conditioners Water heaters Source: Company data Figure 76: Net revenue and net profit forecasts (Rmbmn) (%) 12, 35 Source: Company data Figure 77: ASP of major products (Rmb) 2,5 9, 6, 3, , 1,5 1, E 215E 216E Net revenue Net revenue YoY chg - RHS Net profit YoY chg - RHS Recurring net profit YoY chg - RHS E 215E 216E Washing machines Refrigerators Air conditioners Source: Company data, Credit Suisse estimates Figure 78: Stub P/E for Qingdao Haier (x) Source: Credit Suisse estimates Figure 79: Forward P/E band chart (Rmb) x 11.5x 1.x 8.5x 7.x Apr-1 Oct-1 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Source: Company data, Credit Suisse estimates. Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: Company data, Credit Suisse estimates China Home Appliances Sector 42

43 Key assumptions Figure 8: Gross revenue breakdown Rmb mn E 215E 216E Air conditioner 12,11 14,769 17,925 21,26 24,664 28,931 Refrigerators 25,48 25,17 25,33 25,26 25,776 26,292 Small appliances 1,74 1,686 1,673 1,857 2,8 2,33 Washing machines 12,215 13,273 14,178 15,312 16,69 18,193 Water heaters 3,828 4,486 4,353 4,571 4,937 5,43 Equipment product 8,37 7,172 5,824 5,983 5,385 5,385 ICS 9,932 12,596 16,37 2,384 25,479 31,849 Non-core business Total gross revenue 73,853 79,857 86,488 94,698 15,55 118,948 YoY % chg Air conditioner Refrigerators Small appliances Washing machines Water heaters Equipment product ICS Non-core business Total gross revenue % of total Air conditioner Refrigerators Small appliances Washing machines Water heaters Equipment product ICS Non-core business Total gross revenue Source: Company data, Credit Suisse estimates Figure 81: Gross margins based on gross revenue breakdown % E 215E 216E Air conditioner Refrigerators Small appliances Washing machines Water heaters Equipment product ICS Non-core business Gross margin on gross revenue Source: Company data, Credit Suisse estimates China Home Appliances Sector 43

44 Figure 82: Qingdao Haier income statement Rmb mn E 215E 216E Net revenue 73,52 79,427 86,54 94,224 15,22 118,353 Cost of sales -56,429-59,74-64,586-71,17-79,82-89,316 Gross profit 17,91 19,723 21,468 23,28 25,94 29,37 S&D expenses -9,11-9,629-1,37-1,553-11,552-12,664 Admin expenses -4,6-5,189-5,443-5,842-6,46-7,11 Operating profit 3,922 4,95 5,718 6,813 7,981 9,272 EBITDA 4,535 5,556 6,388 7,515 8,762 1,139 Net finance income FX gains / asset impairment Investment income Net non-operating income Profit before taxation 4,417 5,428 6,714 7,915 9,152 1,618 Taxation ,68-1,163-1,346-1,556-1,85 Profit for the period 3,651 4,361 5,551 6,57 7,596 8,813 Minority interests ,91-1,383-1,648-1,943-2,231 Profit to equity shareholders 2,69 3,269 4,168 4,922 5,653 6,582 Basic EPS (Rmb) Diluted EPS (Rmb) DPS (Rmb) Dividend payout ratio (%) Reported recurring net profit 2,438 3,177 3,759 4,649 5,483 6,42 Non-recurring items Recurring basic EPS (Rmb) Recurring diluted EPS (Rmb) Margins (%) Gross margin Operating margin S&D / Sales Admin / Sales EBITDA margin PBT margin Net margin Recurring net margin Effective tax rate YoY (%) Net revenue Gross profit EBITDA Operating profit PBT Net profit Recurring net profit Diluted EPS ROE (%) ROA (%) Source: Company data, Credit Suisse estimates China Home Appliances Sector 44

45 Figure 83: Qingdao Haier balance sheet Rmb mn E 215E 216E Cash & cash equivalents 12,89 16,284 2,641 27,866 33,42 4,47 Trade and bills receivables 11,3 15,21 2,38 21,782 25,119 27,411 Inventories 5,981 7,99 6,99 6,711 7,156 8,55 Prepayments & other current assets 1,493 1,116 2,22 2,261 2,521 2,84 Total current assets 31,394 39,7 49,611 58,62 68,197 79,226 PP&E 4,537 5,283 5,464 5,933 6,382 6,88 Construction in progress 945 1,64 1,64 2,14 2,64 3,14 Intangible assets ,53 1,467 1,914 Long term equity investment 1,71 2,22 2,713 4,64 4,64 4,64 Other non-current assets ,3 1,172 1,221 1,272 Total non-current assets 8,39 9,989 11,482 14,866 16,278 17,71 Total assets 39,784 49,688 61,93 73,486 84,475 96,927 Trade and bills payables 16,937 21,78 25,881 28,28 32,24 36,3 Customer deposits 2,212 2,5 3,522 3,298 3,676 4,142 Tax and other payables 5,651 6,665 7,445 7,721 8,477 9,41 ST & current portion of LT borrowings 1,169 1,98 1,198 1,112 1,112 1,112 Total current liabilities 25,969 31,341 38,46 4,339 45,289 5,667 Convertible bonds issued by Haier Elec ,763 1,763 1,763 Accrued liabilities 1,492 2,55 2,163 2,415 2,653 2,946 Other current liabilities Total non-current liabilities 2,252 2,921 3,16 4,327 4,566 4,861 Share capital 2,685 2,685 2,721 3,3 3,35 3,4 Reserves 5,656 8,443 11,773 18,974 23,215 28,165 Total shareholders' equity 8,341 11,129 14,494 22,4 26,25 31,25 Minority interests 3,221 4,298 5,537 6,815 8,37 1,194 Total liabilities and equity 39,784 49,688 61,93 73,486 84,475 96,927 Source: Company data, Credit Suisse estimates Figure 84: Qingdao Haier cash flow statement Rmb mn E 215E 216E Pre-tax profit 4,417 5,428 6,714 7,915 9,152 1,618 Taxes paid -1, ,55-1,57-1,62-1,854 Depreciation & amortisation Associate and investment gains Others Operating cash flow before w/c chg 3,498 4,598 5,32 5,963 7,18 8,244 Net change in working capital 2, ,417 Others Operating cash flow 5,977 5,165 6,12 6,762 8,153 9,835 PP&E capex -1,584-1,228-1,751-2,5-2,145-2,239 Decrease (Incr.) in Investments -2, ,891 Others ,481 1,225 1,323 1,56 Investing cash flow -4, ,91-2, Dividends paid ,285-1,621-1,865-2,13 Share capital , Net new borrowings 1, Others Financing cash flow ,158-1,795-2,34 Net change in cash 2,443 3,869 4,21 7,24 5,536 7,68 Source: Company data, Credit Suisse estimates China Home Appliances Sector 45

46 Figure 85: Qingdao Haier's corporate structure *Note: Parentco's Sanyo business includes refrigerator and washing machine businesses in Japan, Philippines, Malaysia, Indonesia, and Vietnam. Source: Company data Figure 86: Qingdao Haier's corporate history Time Event Mar-198 Haier Group ( 海尔集团 ), the ultimate parentco of Qingdao Haier (669.SS) was established Qingdao Refrigerator Factory ( 青岛电冰箱总厂 ), the predecessor of Qingdao Haier, was founded. Nov-1993 Qingdao Refrigerator Factory was renamed as Qingdao Haier Refrigerator Limited Company ( 青岛海尔电冰箱有限公司 ) in July, and was publicly listed in Shanghai Stock Exchange on 19 November Jan-21 The listco issued 1 mn shares at the price of Rmb18. (unadjusted) to acquire additional 74.45% (99.95% after acquisition) stake of Qingdao Haier Air-conditioner Company ( 青岛海尔空调器有限公司 ) at the consideration of Rmb2 bn. The air conditioner business was consolidated. The listco was then renamed as Qingdao Haier in May 21. Aug-21 Parentco implemented capital injection to Haier Electronics International ( 青海尔国际电器 ) by means of transferring a 14.71% interest in Qingdao Haier to Haier Electronics International. Subsequent to the deal, Haier Electronics International held a 29.95% stake, becoming the largest shareholder of Qingdao Haier. Parentco's direct share stake reduced to 12%. May-27 Qingdao Haier placed 142 mn new shares to its parentco in exchange for a 75% equity interest in Qingdao Haier Airconditioning Electronics Company ( 青岛海尔空调电子有限公司 ), an 8% equity interest in Hefei Haier Air-conditioner Company ( 合肥海尔空调器有限公司 ), a 6% equity interest in Wuhan Haier Electronics ( 武汉海尔电器股份有限公司 ), and a 59% equity interest in Guizhou Haier Electronics ( 贵州海尔电器有限公司 ), which solved the problem of domestic inter-group competition. Sep-26 Parentco injected its front loading washing machine and water heater businesses into Haier Electronics. Mar-21 Aug-21 Jun-21 Jun-211 Dec-213 Nov-213 Jul-214 Sep-214 Qingdao Haier acquired an additional of 31.93% stake in Haier Electronics from parentco at a negotiated price of HK$3./share (or HK$1,941 mn in total). It held a 52.3% interest in Haier Electronics after the deal. Haier Electronics was consolidated. Parentco injected Goodaymart into Haier Electronics. Parentco injected Haier Logistics Company ( 海尔物流有限公司 ) into Haier Electronics at the consideration of Rmb763 mn. Parentco injected its after-sales services business and online sales platform (ehaier.com) into Haier Electronics. Qingdao Haier announced to acquire ten upstream supplier companies including module, special steel at a consideration of Rmb1,88 mn, to form a vertically integrated supply chain business model and reduce connected transactions. Alibaba Group became a strategic investor in the logistics business of Haier Electronics under the brand "Goodaymart" with HK$1,857 mn investment. The subsidiary Haier Electronics acquired Shanghai Boyol New Brothers Logistics Services Company ( 上海贝业新兄弟物流有限公司 ) at a consideration of Rmb864 mn. KKR became a strategic investor and co-operator of Qingdao Haier with a subscription of 1% of Qingdao Haier's enlarged issued capital at Rmb3.28 bn. Haier Electronics became one of the 25 investors (total 29.99% stake) in Sinopec Marketing, with a.34% stake and Rmb1,218 mn investment through its wholly owned subsidiary Foreland Agents. Source: Company data, Credit Suisse estimates China Home Appliances Sector 46

47 Management profile Executive directors Mr. Liang Haishan ( 梁海山 ), Chairman and General Manager Liang Haishan, aged 48, is Chairman of the Board and General Manager of Qingdao Haier. He is a Senior Engineer. Mr. Liang has served as director of Management Office of Qingdao Haier Refrigerator Factory, director of Accreditation Centre of Haier Group Corporation, general manager and general secretary of Qingdao Haier Air-Conditioner Company, director and general secretary of Haier Logistics, and senior vice president and executive vice president of Haier Group. He is currently the Chairman of the 8 th Board of Directors and the General Manager of Qingdao Haier. Mr. Liang was awarded the Leadership of Outstanding Contribution of the 11th-Five Year Plan Shandong Province Light Industry, and Senior Expert of Qingdao in 211; and National Labour Medal, National Excellent Informationisation Leadership Award of Light Industry Enterprise, Leadership Award of Top Ten Chinese Strategic Emerging Industry in 212; and National Home Appliance Technology Progress Award, the First Prize of Chinese National Light Industry Council for Scientific and Technological Progress in 213, etc. Ms. Tan Lixia ( 谭丽霞 ), Vice Chairperson, Senior Vice President, and CFO Ms. Tan Lixia, aged 44, has served as director assistant of Haier Air-Conditioning Electronic Import and Export Company, director of Overseas Promotion Department of Haier Group, director of Finance Department of Haier Group. She is currently the Vice Chairperson of the 8 th Board of Directors, Senior Vice President and CFO of Qingdao Haier. Ms. Tan has been awarded the Model Worker of Shandong Province, Excellent Entrepreneur of Shandong Province, Female Leadership of Shandong Province, Person of the Year of Chinese CFO, Person of the Year of Top Ten Women of Chinese Economy, and China Top Ten Female, etc. Ms. Wang Xiaonan ( 王筱楠 ), Vice President Wang Xiaonan, aged 51, was director of human resources in the China Region, and North Asia of Orica China. She is a Director of the 8 th Board and Vice President of Qingdao Haier, responsible for the human resources management for the Group. Ms. Wang was awarded the Top Ten Best Practices in Human Resources Management, Person of the Year of Chinese Human Resources Management, Annual Award for the Best Organization Change and the Best HR Team issued by Waco China in 212; and Person of the Year and HR Team Innovation Awards issued by Chinese Human Resources Development Research Association. Directors Dr. Wu Changqi ( 武常岐 ) Dr. Wu Changqi, aged 59, is the Professor of Strategic Management at Guanghua School of Management, Peking University. Dr. Wu obtained his bachelor s degree in Economics from Shandong University in 1982, and his MBA and PhD degree in Applied Economics from University of Leuven (Belgium) in 199. He was a former associate professor, deputy professor of Department of Economics, Business School of Hong Kong University of Science and Technology; professor and dean of the Strategic Management Division at Guanghua School of Management, Peking University; vice dean of Guanghua School of Management, and Director of EMBA programme, etc. He is currently the Dean of the National High-Tech Industrial Development Strategy Research Institute of Peking University, Dean of Guanghua Cisco's Leadership Institute, and a Director of 8 th Board of Qingdao Haier. China Home Appliances Sector 47

48 Dr. Peng Jianfeng ( 彭剑锋 ) Dr. Peng Jianfeng, aged 53, is the Professor of School of Labour and Human Resources, Renmin University, Chairman of China Stone Management Consulting Group, Vice President of Chinese Human Resource Development Council, Deputy Director of Management and Consultation Committee of China Enterprise Confederation, and a Director of the 8 th Board of Qingdao Haier. Dr. Peng served as the Deputy Dean of School of Labour and Human Resources, Renmin University. Dr. Zhou Honbo( 周洪波 ) Dr. Zhou Honbo, aged 52, is a senior software specialist in Internet of Things (IOT), middleware and cloud computing. He is General Manager of Foton Information Technology Services Company. Dr. Zhou has served as the chief software experts of Tongfang Group (61.SS, NR), CTO and Executive Director of TECHNOVATOR (126.HK, NR), Senior Engineer of IBM and BEA, and researcher of Oak Ridge National Laboratory. Obtaining his PhD degree from Zurich University in 1993, Dr. Zhou was the part-time professor of the EMBA programme of University of Texas, Beijing Jiao Tong University, UESTC, and Beihang University. He was awarded the "Zhongguancun Top Leading Talent" title and employed as a "distinguished expert of Beijing Municipal Government". He is currently a Director of 8 th Board of Qingdao Haier. Independent directors Dr. Liu Feng ( 刘峰 ) Dr. Liu Feng, aged 48, has served as the Professor of School of Management and Director of Accounting and Financial Research Institute, Sun Yat-sen University. Dr. Liu is currently the Professor of Accounting at Xiamen University, and an Independent Director of the 8 th Board of Qingdao Haier. Dr. Wu Cheng ( 吴澄 ) Dr. Wu Cheng, aged 74, is an information and automation expert, academician of the Chinese Academy of Engineering. Dr. Wu graduated from Tsinghua University with a Bachelor s degree in 1962, and with a Postgraduate degree in Currently he is the Professor of Department of Automation, Tsinghua University, Director of Chinese CIMS Engineering Technology Research Centre, an Independent Director of the 8 th Board of Qingdao Haier, and an Independent Director of Kingdee International Software Group (268.HK, NR). Dr. Shi Tiantao ( 施天涛 ) Dr. Shi Tiantao, aged 52, has served as the visiting fellow of East Asia Political Economy Research Institute of Singapore, visiting Professor of Law School of Stanford University, member of 1 th CPPCC of Beijing Municipal City, Deputy Dean of Law School of Tsinghua University. He is currently the Professor of Law School of Tsinghua University, Director of Financial and Legislation Research Centre of Law School of Tsinghua University, Vice President of Research Association of Chinese Securities Law, and Vice President of Research Association of Chinese Insurance Law, and an Independent Director of the 8 th Board of Qingdao Haier. Supervisors Mr. Wang Peihua ( 王培华 ), Chairman of Supervisor Board Mr. Wang Peihua, aged 57, is a Senior Political Supervisor. He has served as the Deputy Party Secretary of air conditioner, washing machine, freezer and electric heater department of Haier Group, President of Labour Union of equipment department of Haier Group. He is currently the Deputy Secretary of the Disciplinary Inspection Committee of Haier Group, and the Chairman of the 8 th Board of Supervisors of Qingdao Haier. China Home Appliances Sector 48

49 Mr. Ming Guoqing ( 明国庆 ) Mr. Ming Guoqing, aged 54, is a Senior Political Supervisor. He has served as the deputy secretary of the Disciplinary Inspection Commission of Qingdao Refrigerator Factory, party secretary and vice general manager of Qingdao Haier Logistics Company, deputy director of Organizational Department, and director of Comprehensive Department of Qingdao Haier, deputy party secretary and president of the Disciplinary Committee of Haier Refrigerator Product Department, and president of Labour Union of Qingdao Haier. Mr. Ming is currently the President of Labour Union of Haier Group, and the Supervisor of 8 th Board of Supervisors of Qingdao Haier. Ms. Wang Yuqing ( 王玉清 ) Ms. Wang Yuqing, aged 39, was formerly the employee supervisor of Qingdao Haier s Board of Supervisors, and the office secretary of the listco. She is currently the Supervisor of Qingdao Haier s 8 th Board of Supervisors, and the Director of the General Manager Office of the listco. Senior management Mr. Gong Wei ( 宫伟 ), Vice General Manager and Finance Controller Mr. Gong Wei, aged 41, has served as financial manager of Qingdao Haier, senior financial manager and senior financial analyst of Haier Group, finance controller of Haier washing machine department, air-conditioner department, and white appliances department. He is currently the Vice General Manager and Finance Controller of Qingdao Haier. Mr. Gong was awarded the Youth Talent of Qingdao City, Excellent Accounting Practitioner of Shandong Province, National Excellent Accounting Practitioner, and the Person of the Year 211 Top Ten CFOs elected by New Wealth Management Magazine. Ms. Ming Guozhen ( 明国珍 ), Board Secretary Ms. Ming Guozhen, aged 5, is a Senior Economist. She was a lecturer of the Department of Investment, and deputy director of the Economic Department in China Institute of Finance and Investment. She has served as a salesperson of China Everbright International Trust and Investment Company, responsible for several business lines and management functions. She has also served as the Executive Vice President of China Analyst Professional Committee of CSRS, Deputy Director of Association Membership Management Committee, and Deputy Director of Standards of Practice Committee. She is currently the Vice General Manager and Board Secretary of Qingdao Haier. Haier Group (ultimate parent company) Mr. Zhang Ruimin ( 张瑞敏 ), Founder, Chairman and CEO of Haier Group Mr. Zhang Ruimin, aged 65, is the Founder, Chairman and CEO of Haier Group, and the alternative member of the 16 th, 17 th, and 18 th Central Committees of the Communist Party of China. Mr. Zhang is a world renowned entrepreneur for his remarkable work in turning an insolvent refrigerator manufacturer into one of the world largest white appliances companies. Mr. Zhang has established the corporate culture of "innovation as the core value", and kept customer-oriented strategy to push forward the corporate to grow continuously. His management philosophy and achievements have attracted wide appraisals globally. Business schools such as Harvard, Spanish IESE business school have included Haier s management cases in their teaching materials. Mr. Zhang has also been granted numerous top awards and honours worldwide, including "Global Top 5 Greatest Leaders" by "FORTUNE" Magazine in 214, the only entrepreneur invited for a presentation on the 73 rd American Academy of Management Meeting in 213, and awarded the "Dale Carnegie Leadership Award in 212. China Home Appliances Sector 49

50 Asia Pacific / China Consumer Electronics Midea Group Rating OUTPERFORM* Price (22 Oct 14, Rmb) 2.41 Target price (Rmb) 3.¹ Upside/downside (%) 47. Mkt cap (Rmb mn) 86,45 (US$ 14,64) Enterprise value (Rmb mn) 82,978 Number of shares (mn) 4, Free float (%) week price range ADTO - 6M (US$ mn) 57.3 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance Price (LHS) Research Analysts Eva Wang eva.wang@credit-suisse.com Rebased Rel (RHS) 14 Sep-13 Jan-14 May-14 Sep-14 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 22/1/14 On 22/1/14 the spot exchange rate was Rmb6.12/US$ Performance Over 1M 3M 12M Absolute (%) Relative (%) (333.SZ / 333 CH) INITIATION Well diversified to capture growth We initiate coverage with an OUTPERFORM rating and a Rmb3. target price, implying 47% potential upside. Midea Group is a welldiversified white appliances conglomerate with presence in ACs (No.2 in China), washing machines (No.2), water heaters (No.3), and ranking No.1 in many small appliances, such as rice cooker and water purifier, according to China Market Monitor and China IOL. We like its product portfolio diversification, exposure to the fast-growing small appliances market and product mix and margin improvement. New product development and leadership position in small appliances. We believe Midea Group will benefit from: (1) strong R&D and new product development, which help to improve its ASP and profitability; (2) a welldiversified small appliances portfolio, which is expected to achieve higher growth than large white appliances due to low penetration, e.g., water purifier domestic sales volume grew 38%YoY in 7M14, in which market Midea brand has No.1 market share; and (3) commitment to new industry trends, such as its smart home system M-Smart and e-commerce development. Catalysts: Strong EPS growth and share repurchase plan. We expect Midea Group to report strong 11% net profit growth and 45% EPS growth in 214, driven by good top-line growth of 17% and 3.2 pp net margin improvement. Another catalyst is the share purchase plan phase I no later than 1H15 and phase II no later than 1H16, with total funds capped at 3% of 214E net profit to shareholders, with buy-back stocks (~3.7% of total) to be used for management incentives. Valuation and investment risks. Midea Group is trading at a low 6.9x 215E P/E, despite a strong three-year EPS CAGR of 26% for E. Our target price of Rmb3. (implying 47% upside potential) is based on a target 1.x 215E P/E, at a discount to key industry players' five-year average forward P/E of 11x due to a lack of track record. Risks to our call include slower growth of white appliances in China, a delay in new product development, fierce competition, and lower-than-expected margins. Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 12, , , ,374.5 EBITDA (Rmb mn) 1, , , ,892. EBIT (Rmb mn) 8, , , ,819.8 Net profit (Rmb mn) 5, , , ,28.3 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. China Home Appliances Sector 5

51 Air-conditioner Refrigerator Washing machine Rice cooker Induction cooker Pressure cooker Electric kettle Microwave oven Water purifier Kitchen stove Range hood Vacuum cleaner Electric fan Water heater 24 October 214 Focus charts Figure 87: Gross revenue breakdown (213) Figure 88: Geographic breakdown (213) Motor 4% Logistics 1% Non-core business 7% Export +5.3% YoY Small appliances 23% Air onditioning 51% Export Rmb45,83 mn 4% Domestic Rmb67,314 mn 6% Washing machines 7% Refrigerators 7% Domestic +26.4% YoY Source: Company data Source: Company data Figure 89: Domestic market share (213) (%) #1 5 # #1 # # #1 3 # # #6 #5 # #3 1.6 # #3 8.5 Figure 9: Net revenue and net profit forecast (Rmbmn) (%) 2, , , 6 3 5, E 215E 216E Net revenue Net revenue YoY chg - RHS Net profit YoY chg - RHS Recurring net profit YoY chg - RHS Source: Company data Figure 91: ASP of major products (Rmb) 2,5 2, 1,5 Source: Company data, Credit Suisse estimates Figure 92: Forward P/E band chart Rmb x 7.5x 7.x 1, x 6.x E 215E 216E Washing machines Refrigerators Air conditioners 14. Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates China Home Appliances Sector 51

52 Key assumptions Figure 93: Gross revenue breakdown Rmb mn E 215E 216E Air conditioning and parts 63,791 51,464 62,178 72,913 84,238 96,923 Refrigerators and parts 11,46 5,951 8,131 9,739 1,939 12,287 Washing machines and parts 9,76 6,214 8,53 9,651 11,253 12,998 Small appliances 31,656 25,762 27,844 32,577 38,441 45,361 Motor 4,79 4,853 4,431 4,298 4,298 4,427 Logistics 1,92 1,846 1,759 1,671 1,671 1,755 Non-core business 1,95 6,624 8,869 1,376 11,414 12,555 Total gross revenue 134,128 12, , , , ,36 YoY % chg Air conditioning and parts Refrigerators and parts Washing machines and parts Small appliances Motor Logistics Non-core business Total gross revenue % of total Air conditioning and parts Refrigerators and parts Washing machines and parts Small appliances Motor Logistics Non-core business Total gross revenue Source: Company data, Credit Suisse estimates Figure 94: Gross margin based on gross revenue breakdown % E 215E 216E Air conditioning and parts Refrigerators and parts Washing machines and parts Small appliances Motor Logistics Non-core business Gross margin on gross revenue Source: Company data, Credit Suisse estimates China Home Appliances Sector 52

53 Figure 95: Midea Group income statement Rmb mn E 215E 216E Net revenue 133,367 12,135 12,655 14, , ,375 Cost of sales -18,43-79,511-93,23-14, , ,8 Gross profit 24,936 22,624 27,632 35,589 41,973 48,294 Selling & distribution expenses -11,63-9,39-12,432-14,755-16,952-19,464 Admin expenses -5,198-5,926-6,733-7,869-9,41-1,1 Operating profit 8,18 7,39 8,466 12,966 15,98 18,82 EBITDA n.a. 9,54 1,981 15,471 18,763 21,892 Net finance income / (costs) -1, FX gains / asset impairment Share of profit of associates and JVs Investment income / fair value change , Net non-operating income Profit before taxation 8,229 7,71 1,12 14,565 17,765 2,848 Taxation -1,578-1,569-1,714-2,622-3,553-4,17 Profit for the period 6,652 6,141 8,297 11,943 14,212 16,678 Minority interests -3,179-2,882-2,98-1,248-1,427-1,65 Profit to equity shareholders 3,473 3,259 5,317 1,695 12,785 15,28 Basic EPS (Rmb) Diluted EPS (Rmb) DPS (Rmb) Dividend payout ratio (%) Reported recurring net profit 2,818 3,28 3,93 1,12 12,243 14,471 Non-recurring items , Recurring basic EPS (Rmb) Recurring diluted EPS (Rmb) Margins (%) Gross margin Operating margin S&D / Sales Admin / Sales EBITDA margin PBT margin Net margin Recurring net margin Effective tax rate YoY (%) Net revenue Gross profit EBITDA Operating profit PBT Net profit Recurring net profit Diluted EPS ROE (%) ROA (%) Source: Company data, Credit Suisse estimates China Home Appliances Sector 53

54 Figure 96: Midea Group balance sheet Balance sheet E 215E 216E Cash & cash equivalents 12,746 13,436 15,574 14,857 25,479 37,378 Bank wealth management entrustment 18,168 18,531 18,92 Trade and bills receivables 2,337 22,251 22,79 27,97 29,531 36,493 Inventories 16,343 13,35 15,198 16,317 19,567 21,66 Prepayments and other receivables 5,597 2,924 3,484 3,513 4,36 4,634 Other current assets 3,76 2, Total current assets 62,22 55,562 65,327 87,337 13, ,741 PP&E 17,49 2,253 19,572 2,755 21,888 22,444 Intangible assets and goodwill 6,645 7,145 6,257 6,595 6,982 7,356 Long term equity investment 1,768 1,71 1,756 1,812 1,869 1,929 Deferred tax assets ,567 3,337 3,54 3,679 Other non-current assets 3,795 2,275 1,467 1,33 1,491 1,577 Total non-current assets 3,42 32,174 31,619 33,82 35,734 36,986 Total assets 92,622 87,737 96, , , ,727 Trade and bills payables 28,176 25,17 23,817 24,888 27,37 34,78 Customer deposits 6,32 3,57 4,983 4,216 4,843 5,561 Other payables and accruals 4,11 4,98 4,649 6,811 7,54 8,361 Short-term & current portion of long-term borrowings 6,828 9,27 1,49 1,92 13,76 13,745 Other current liabilities 9,652 8,216 12,79 24,825 28,282 32,225 Total current liabilities 54,699 5,81 56,647 71,658 81,49 93,971 Long-term borrowing and corporate bonds 7,68 3, Other non-current liabilities Total non-current liabilities 7,747 3,761 1,218 1,83 1,888 1,954 Share capital 1, 1, 1,686 4,216 4,216 4,216 Reserves 11,525 13,314 31,161 35,954 43,391 52,27 Total shareholders' equity 12,525 14,314 32,847 4,17 47,67 56,243 Minority interests 17,65 18,852 6,233 7,481 8,98 1,558 Total liabilities and equity 92,622 87,737 96, , , ,727 Source: Company data, Credit Suisse estimates Figure 97: Midea Group cash flow statement Cash flow statement E 215E 216E Pre-tax profit 8,229 7,71 1,12 14,565 17,765 2,848 Taxes paid -1,741-1,742-3,341-1,568-3,586-4,23 D&A 2,232 2,515 2,55 2,783 3,72 Change in micro loans , Others -1, , ,452-1,726 Operating cash flow before w/c chg 4,834 7,837 2,66 15,1 15,361 17,838 Net change in working capital 1,89-2,689 6,7-6,421-1,72-1,44 Others -4,435 1, ,81 3,148 3,594 Operating cash flow 2,289 6,321 8,456 22,398 16,87 19,992 PPE & acquisition capex -9,7-4,78-2,115-4,35-4,51-4,11 Change in and gains from Investments , Others ,471-16, Investing cash flow -8,582-3, ,89-3,63-2,444 Dividends paid -1,773-1,334-1,518-3,373-5,348-6,392 Net new borrowings 8,288-3,393-1, , Others 5,212 1,88-1,57-1,19 Financing cash flow 11,728-3,638-4,568-4,216-3,123-5,648 Net change in cash 5, ,223-1,97 1,622 11,9 Source: Company data, Credit Suisse estimates China Home Appliances Sector 54

55 Figure 98: Midea Group's corporate structure Source: Company data Figure 99: Midea Group corporate history Time Event 1968 Founder Mr. He Xiangjian started Midea Group business with a workshop for the production of bottle lids in Beijiao, Shunde. 198 Midea Group entered the home appliances industry by manufacturing electric fans Midea Group started the air conditioner manufacturing business. 12-Nov-1993 Midea Group's subsidiary GD Midea (formerly 527.SZ), which operated large appliances within Midea Group, was listed in Shenzhen Exchange GD Midea (formerly 527.SZ) acquired a 6% equity interest in Toshiba Macro, a compressor manufacturer, forming a vertically integrated supply chain of air conditioner production. 22 GD Midea (formerly 527.SZ) established the refrigerator business. Oct-24 Midea Group acquired a 42.4% interest in Hualing Group (382.HK), a producer of refrigerators and air-conditioners. In 28, to avoid horizontal competition and streamline business structure, Midea Group exchanged all assets between Hualing and Welling (Midea Group's subsidiary which is engaged in the production of electric motor). Hualing Group was then renamed as Welling Holding Limited, which continued to be listed in Hong Kong Exchange in ticker of 382.HK. May-26 Midea Group acquired a 9% interest in Annto Logistics. Mar-28 Oct-21 Nov-21 Nov-211 Nov-211 to Mar Sep-213 Aug-214 GD Midea (formerly 527.SZ) acquired a 24.1% stake in Wuxi Little Swan (418.SZ) in a cash consideration of Rmb1,68 mn. Combined with 4.93% Little Swan B-share acquired in the secondary market, GD Midea (formerly 527.SZ) became the largest shareholder of Little Swan with a 28.94% stake. GD Midea (formerly 527.SZ) acquired a 32.5% equity interest in Miraco Corp, an air-conditioner maker in Egypt, at the cost of US$57.48 mn. Wuxi Little Swan executed an asset restructuring, placing new shares to GD Midea (formerly 527.SZ) in exchange for a washing machine asset held by GD Midea (formerly 527.SZ) to avoid horizontal competition. Plus additional shares bought in secondary market, GD Midea's (formerly 527.SZ) stake in Little Swan increased to 4.8% by early 212. GD Midea (formerly 527.SZ) acquired a 51% stake of Carrier America Corp, a leading air-conditioner producer in Latin America region at a consideration of US$223.3 mn. Midea Group introduced two strategic investors, ICBCI and CDH Fund. ICBCI and CDH subscribed 13.33% and 7.82% equity interest in Midea Group at the cost of Rmb6,998 mn and 4,15 mn, respectively, or Rmb52.5/share. Adjusted for the cash payback of Rmb5 before listing of Midea Group and share capital expansion, the cost per share is equivalent to Rmb2.5. Midea Group merged with GD Midea (formerly 527.SZ) through new share issuance and share exchange in September 213. Midea Group (333.SZ) got listed on Shenzhen Stock Exchange, and GD Midea (formerly 527.SZ) was delisted. Midea Group, together with TITONI (its wholly-owned subsidiary), acquired a 12.59% additional stake of Little Swan. Source: Company data, Credit Suisse China Home Appliances Sector 55

56 Management profile Executive directors Mr. Fang Hongbo ( 方洪波 ), Chairman and President Mr. Fang Hongbo, aged 47, joined Midea in 1992 and has served as general manager of Midea Air-conditioning Business Department, president of Midea Refrigeration Electric Appliances Group, chairman and president of GD Midea Holding, etc. He is currently serving as Chairman and President of Midea Group, and also Chairman of the company's subsidiary, Wuxi Little Swan Co., Ltd (418.SZ, NR). Mr. Fang holds a master's degree. Ms. Yuan Liqun( 袁利群 ), Director, Senior Vice President, and CFO Ms. Yuan Liqun, aged 45, joined Midea in 1992 and was director of GD Midea Holding Co., Ltd. She is the Director, Senior Vice President and Financial Director of the company. She also acts as directors of Welling Holding Co., Ltd. (382.HK, NR) which is controlled by the company, and Guangdong Shunde Rural Commercial Bank, an associate of the company. Ms. Yuan has a master's degree and is representative of the National People's Congress. Mr. Wu Wenxin ( 吴文新 ), Director, Senior Vice President Mr. Fang Hongbo, aged 5, joined Midea in 1993 and was appointed as president of Midea Air-conditioning Domestic Business Department. He is currently Director and Senior Vice President of the company, and President of the Air-conditioning Business Department. Mr. Wu holds a master's degree. Directors Mr. Li Jianwei ( 栗建伟 ) Mr. Li Jianwei, aged 48, joined Midea in 1994, and was vice chairman of GD Midea Holdings, and director of Company Strategic Business Development. He is now the Director of the company and Midea Holding, the controlling shareholder of the company. Mr. Li holds a master's degree. Mr. He Jianfeng ( 何剑峰 ) Mr. He Jianfeng, aged 47, is the son of company founder. He was president of Shunde Modern Industrial, and is one of the company s directors now. Mr. He is also the Chairman and President of Yingfeng Investment Holding Group, Chairman of Zhejiang Shangfeng Industrial. Mr. He has a bachelor's degree. Mr. Li Feide ( 李飞德 ) Mr. Li Feide, aged 37, joined Midea in 1999 and served as company secretary of GD Midea Holding and the company's Board. He is currently Director, Director of Strategy Business Department, and Director of Welling Holding (382.HK, NR). Mr. Li has a master's degree. Mr. Xu Hai ( 徐海 ) Mr. Xu Hai, aged 38, was executive director of Goldman Sachs Gaohua Co., Ltd. He is now Managing Director of ICBC International Holdings Ltd. Mr. Xu holds a bachelor's degree. Ms. Hu Xiaoling ( 胡晓玲 ) Ms. Hu Xiaoling,, was a senior auditor for Arthur Andersen Accounting Firm and senior manager of Direct Investment Department in China International Capital Co., Ltd. She is a designated representative of Tianjin CDH Equity Investment and director of Midea Group. Ms. Hu has a master's degree. China Home Appliances Sector 56

57 Independent directors Dr. Wu Shinong ( 吴世农 ) Dr. Wu Shinong, aged 58, is a professor of the Management School of Xiamen University. Dr. Wu is also a member of Business Administration Subjects Consultative Group of the Academic Degrees Committee of the State Council, National Natural Science Foundation of China, among others. Dr. Fu Zhengping ( 符正平 ) Dr. Fu Zhengping, aged 49, is a professor of the Management School and Director of the Finance Department of Sun Yat-sen University. He also holds a concurrent position as vice president of Guangdong Province Enterprise Director Association Expert Committee, a member of China Quality Association Academic Committee and the managing director of Guangdong Province Economy Research Society for Young and Mid-Career Professionals. Dr. Zhu Guilong ( 朱桂龙 ) Dr. Zhu Guilong, aged 5, is professor and chairman of the Business Administration College of South China University of Technology, and director of Technological Innovation Centre of the University. Dr. Zhu also holds a concurrent position as vice president of Systems Engineering Society of China, vice president of Systems Engineering Society of Guangdong Province, vice president of Guangdong Association for Search and Technology. Mr. Guo Xuejin ( 郭学进 ) Mr. Guo Xuejin, aged 55, is director of Guangdong Kings Law Firm. He is member of the Guangzhou 14th People's Congress, member of Guangzhou Law Committee of the NPC, arbitrator of Guangzhou Arbitrator Committee, and expert consultant of Guangzhou Traffic Committee. Mr. Guo holds a master's degree. Dr. Li Wenjing ( 黎文靖 ) Dr. Li Wenjing, aged 35, is professor and vice director of the Accounting Department of Jinan University. He also holds a concurrent position as member of Accounting Society of China, director of Accounting Academy of Guangdong Province, researcher of Managerial Accounting Research Centre of Jinan University, and researcher of Social Responsibility and Environmental Accounting Research Centre of Jinan University. Supervisors Ms. Zeng Qiao ( 曾巧 ), Chairman of Board of Supervisors Ms. Zeng Qiao, aged 41, joined Midea in She is Chairman of the Company Supervisory Board and director of Division of Auditing Supervision. Ms. Zeng has a master's degree. Mr. Zhao Jun ( 赵军 ) Mr. Zhao Jun, aged 39, joined Midea in 2. He has served as CFO and Director of Board of GD Midea Holding. Mr. Zhao is CFO, and Assistant of CEO of Midea Holdings. Mr. Zhao has a master's degree. Ms. Li Baoqiong ( 李宝琼 ) Ms Li Baoqiong, aged 33, joined Midea in 24. She has served as general manager of Operational and Human Resources Department of Midea Group, and currently Senior Specialist of Human Resources of Midea Group. Ms. Li holds a Bachelor's degree. China Home Appliances Sector 57

58 Senior management Dr. Zhu Fengtao ( 朱凤涛 ), Senior Vice President Dr. Zhu Fengtao, aged 46, joined Midea in 1993 and has served as marketing manager of Midea Lifestyle Appliance Department, and president of Midea Microwave Oven Manufacturing Department. Dr. Zhu is now a Senior Vice President of the company and the General Manager of the Kitchenware Business Department. Dr. Gu Yanmin ( 顾炎民 ), Senior Vice President Dr. Gu Yanmin, aged 51, joined Midea in 2. He was president of Midea Planning and Investment Department, president of Midea Air-conditioning Overseas Strategic Business Department, and vice president of Midea Air-conditioning Department. Dr. Gu is now a Senior Vice President of the company, and Vice President of Oversea Strategic Business Department. Mr. Jiang Peng ( 江鹏 ), Board Secretary Mr. Jiang Peng, aged 41, joined Midea in 27. He was Secretary of the Board of Star Lake Bioscience (6866.SS, NR), and the Board of GD Midea Holding. Mr. Jiang now serves as Secretary of the Company Board. China Home Appliances Sector 58

59 Asia Pacific / China Consumer Electronics Gree Electric Appliance Rating OUTPERFORM* Price (22 Oct 14, Rmb) Target price (Rmb) 39.¹ Upside/downside (%) 41.7 Mkt cap (Rmb mn) 82,776 (US$ 13,53) Enterprise value (Rmb mn) 48,86 Number of shares (mn) 3,7.87 Free float (%) week price range ADTO - 6M (US$ mn) 73.4 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance Research Analysts Eva Wang eva.wang@credit-suisse.com 4 Price (LHS) Rebased Rel (RHS) Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 22/1/14 On 22/1/14 the spot exchange rate was Rmb6.12/US$ Performance Over 1M 3M 12M Absolute (%) Relative (%) (651.SZ / 651 CH) INITIATION No.1 AC manufacturer in China at a low P/E We initiate coverage with an OUTPERFORM rating and a Rmb39. target price, implying 42% potential upside. Gree is a leading AC manufacturer in China with a 35% market share in the residential AC market (No.1 in terms of sales volume, according to China IOL) and a 16% market share in the central AC market (in sales value, according to Central AC Business Information). We like its strong R&D capabilities and strong financial position (214E net cash = 41% market cap), which is not justified by the current low valuation multiple. Strong R&D and leadership position in the AC market. We believe Gree's strong R&D capabilities enable it to launch new products every year to improve product functions and efficiency. Its R&D efforts have been recognised nationally with key technologies enrolled in national programmes/awards. Its No.1 position in the AC market, especially in the domestic residential AC market (44% according to China IOL, far ahead of No.2's market share of 23%), helps it maintain higher margins than peers. Catalysts: Removal of overhang on parentco's shareholding change. Gree's stock price has been lacklustre due to market concerns about any potential change in the company's strategy or management from the shareholding structure change of its parentco, Gree Group, as Zhuhai SASAC plans to sell its ~49% stake in Gree Group to a third party. We believe this will have little impact on listco's strategy and operations, and the buyer of the deal may be finalised and disclosed by 214 year-end. Valuation and investment risks. Gree is trading at a depressed 5.6x 215E P/E, despite a healthy three-year EPS CAGR of 15% for E. Our target price of Rmb39. (implying 42% potential upside) is based on a target 8.x 215E P/E, at a discount to key industry players' five-year average forward P/E of 11x, but in line with its own five-year average forward P/E. Risks to our call include slower growth of white appliances in China, over-reliance on a single sector and a lack of diversification, product quality and service issues, as well as intensified competition and price war. Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 119, , , ,34. EBITDA (Rmb mn) 11, , , ,684.4 EBIT (Rmb mn) 1, , ,32. 18,9.4 Net profit (Rmb mn) 1, , , ,454.4 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. China Home Appliances Sector 59

60 Focus charts Figure 1: Gross revenue breakdown (213) Non-core business Other products 1% 1% Small appliances 1% Figure 11: A/C market share (%) AC and parts 88% M14 Total Domstic Export Source: Company data Figure 12: Net revenue and net profit forecast (Rmbmn) (%) 18, 5 Source: China IOL Figure 13: ASP of A/C products (Rmb) (%) 3, 15 15, 4 2,5 12, 9, 6, 3 2 2, 1,5 1, 1 5 3, E 215E 216E Net revenue Net revenue YoY chg - RHS Net profit YoY chg - RHS Recurring net profit YoY chg - RHS E 215E 216E ASP YoY chg - RHS Source: Company data, Credit Suisse estimates Figure 14: Commercial and residential A/C sales forecast (Rmbmn) (%) 16, 45 Source: Credit Suisse estimates Figure 15: Forward P/E band chart Rmb 11.5x 1.x x 12, x 8, 4, x E 215E 216E Commercial AC revenue Residential AC revenue Commercial AC rev YoY chg - RHS Residential AC rev YoY chg - RHS Source: Credit Suisse estimates 5. Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: Company data, Credit Suisse estimates China Home Appliances Sector 6

61 Key assumptions Figure 16: Gross revenue breakdown Rmb mn E 215E 216E Air conditioner and parts 74,785 88,886 15, , , ,874 Small household appliances 1,291 1,453 1,618 2,265 3,171 4,44 Other products ,89 1,252 1,44 Non-core business 6,763 8,862 11,99 14,392 16,13 17,97 Total gross revenue 83,517 1,11 12,43 134, , ,661 YoY % chg Air conditioner and parts Small household appliances Other products Non-core business Total gross revenue % of total Air conditioner and parts Small household appliances Other products Non-core business Total gross revenue Source: Company data, Credit Suisse estimates Figure 17: Gross profit breakdown Gross margin on gross revenue (%) E 215E 216E Air conditioner and parts Small household appliances Other products Non-core business Gross margin on gross revenue GP incl. business tax (Rmb mn) Air conditioner and parts 13,825 24,474 36,43 41,969 47,25 52,515 Small household appliances ,154 Other products Non-core business 1,275 1,798 2,332 3,31 3,71 4,119 Gross profit incl. business tax 15,367 26,676 39,165 46,21 51,915 57,989 YoY % chg Air conditioner and parts Small household appliances Other products Non-core business Gross profit incl. business tax % of total Air conditioner and parts Small household appliances Other products Non-core business Gross profit incl. business tax Source: Company data, Credit Suisse estimates China Home Appliances Sector 61

62 Figure 18: Gree Electric Appliance income statement Rmb mn E 215E 216E Net revenue 83,19 99,52 119,87 133,253 15, ,34 Cost of sales -68,15-73,434-8,878-88,37-99, ,672 Gross profit 14,869 26,86 38,29 44,946 5,71 56,632 S&D expenses -8,5-14,626-22,59-24,652-27,836-31,136 Admin expenses -2,783-4,56-5,9-5,73-6,545-7,45 Operating profit 4,35 7,44 1,61 14,565 16,32 18,9 EBITDA 4,649 8,355 11,85 15,859 17,766 19,684 Net finance income ,199 FX gains / asset impairment Other investment income Change in fair value of investments ,283 Net non-operating income 1, Profit before taxation 6,329 8,763 12,892 14,79 17,433 19,495 Taxation -1,31-1,317-1,956-2,26-2,615-2,924 Profit for the period 5,297 7,446 1,936 12,53 14,818 16,57 Minority interests Profit to equity shareholders 5,237 7,38 1,871 12,415 14,714 16,454 Basic EPS (Rmb) Diluted EPS (Rmb) DPS (Rmb) Dividend payout ratio (%) Reported recurring net profit 5,16 6,995 8,98 12,926 14,46 16,146 Non-recurring items , Recurring basic EPS (Rmb) Recurring diluted EPS (Rmb) Margins (%) Gross margin Operating margin S&D / Sales Admin / Sales EBITDA margin PBT margin Net margin Recurring net margin Effective tax rate YoY (%) Net revenue Gross profit EBITDA Operating profit PBT Net profit Recurring net profit Diluted EPS ROE (%) ROA (%) Source: Company data, Credit Suisse estimates China Home Appliances Sector 62

63 Figure 19: Gree Electric Appliance balance sheet Rmb mn E 215E 216E Cash & cash equivalents 16,41 28,944 38,542 43,6 54,699 66,589 Trade and bills receivables 34,892 35,767 48,147 54,44 55,626 64,722 Inventories 17,53 17,235 13,123 15,647 16,847 19,516 Prepayments & other current assets 3,32 3,142 3,922 3,533 3,963 4,49 Total current assets 71,756 85,88 13, , , ,236 PP&E 7,79 12,7 14,34 15,214 16,148 16,94 Construction in progress 2,172 2,34 1,862 1,262 1,362 1,462 Intangible assets 1,622 1,635 2,37 2,467 2,562 2,653 Disbursement of loans and advances 2,89 4,565 5,22 5,273 5,537 Deferred tax assets 1,69 2,911 5,683 5,967 6,265 6,578 Other non-current assets ,456 1,636 1,664 1,689 Total non-current assets 13,456 22,479 29,97 31,568 33,274 34,859 Total assets 85,212 17, ,72 148, ,49 19,95 Trade and bills payables 26,28 3,649 35,665 44,891 46,92 55,724 Customer deposits 19,753 16,63 11,986 3,998 4,514 5,49 Tax and other payables 3,44 9,342 12,618 11,488 12,176 12,89 Short term bank borrowings and other deposits 5,167 6,115 5,12 6,872 6,372 5,872 Sales rebate 8,283 14,346 28,827 31,981 36,112 4,393 Other current liabilities 1,36 1,747 2,275 2,712 3,13 3,324 Total current liabilities 64,193 78,83 96,491 11,941 18, ,251 Total non-current liabilities 2,641 1,156 1,744 2,795 2,821 2,849 Share capital 2,818 3,8 3,8 3,8 3,8 3,8 Reserves 14,789 23,735 31,575 39,478 49,227 59,795 Total shareholders' equity 17,67 26,743 34,583 42,486 52,235 62,83 Minority interests ,75 1,191 Total liabilities and equity 85,212 17, ,72 148, ,49 19,95 Source: Company data, Credit Suisse estimates Figure 11: Gree Electric Appliance cash flow statement Rmb mn E 215E 216E Pre-tax profit 6,329 8,763 12,892 14,79 17,433 19,495 Taxes paid -2, ,293-2,887-3,21 Depreciation & amortisation ,195 1,295 1,446 1,594 Others , ,67-1,339 Operating cash flow before w/c chg 3,683 9,594 1,813 13,795 14,925 16,54 Net change in working capital ,924 4,359-9, ,33 Other operating cash flow ,295 2,87 4,24 4,149 Operating cash flow 2,679 17,41 11,877 7,135 18,538 19,359 PP&E capex -4,778-3,62-2,461-2, -2,6-2,6 Change in Investments 1, Others 1, , ,221 1,516 Investing cash flow -2,3-3,472-1, ,379-1,84 Dividends paid ,47-2,917-4,512-4,966-5,886 Share capital 3,198 Net new borrowings 3,296-1,834-1,246 2, Others -3,114 1,125 1,997 2 Financing cash flow ,82-2,166-1,718-5,466-6,386 Net change in cash ,11 8,36 4,464 11,693 11,89 Source: Company data, Credit Suisse estimates China Home Appliances Sector 63

64 Figure 111: Gree Electric Appliance's corporate structure Source: Company data Figure 112: Gree Electric Appliance's corporate history Time Event Mar-1985 Gree Group (the parentco), formerly known as Zhuhai Economic Special Zone Industrial Development Company ( 珠海经济特区工业发展总公司 ), was established on approval of Zhuhai Municipal Government. Jan-1989 The Group set up a subsidiary, Haili Air-conditioning Engineering Co., Ltd. ( 珠海海利空调器厂 ), on approval of Zhuhai Municipal Industrial Committee and the PBoC Zhuhai Branch. Haili was later renamed as Gree Electric Appliance INC. of Zhuhai in 1994 on approval of Zhuhai City Commission for Economic Restructuring. May-1991 The Zhuhai production base of the company commenced construction, which was put into operation in Nov Nov-1996 Jun-21 Apr-24 Oct-24 Mar-26 Apr-26 Apr-27 Dec-27 Jan-28 Jul-28 Mar-29 Feb-212 Sep-213 Feb-214 Gree Electric Appliance went public, listed on Shenzhen Stock Exchange. Gree Electric Appliance (Brazil) with a capex of US$2 mn and planned annual A/C production capacity of 2, sets was established in Manaus, Brazil, marking the first step of Gree's globalisation. The company's Chongqing manufacturing base commenced operation in two phases (planned capacity of 3 mn sets in total); with its Zhuhai production base, Gree Electric Appliance became one of the leading A/C manufacturers worldwide. The company merged small appliances business from its parentco by a free transfer of 75% equity interest in Zhuhai Gree Small Appliances Company ( 珠海格力小家电有限公司 ), along with the majority interest in other three companies engaged in the manufacturing of upstream A/C components. The company executed the share split reform ( 股权分置改革 ). According to the promise of share split reform, parentco distributed 8.92% equity interest to the float shareholders of the company, and transferred the ownership of "GREE" trademark to Gree Electric Appliance. The company acquired Zhuhai Kaibang Motor Manufacturing Company at a consideration of Rmb11.86 mn. The company introduced a strategic investor, Jinghai Guaranteed Investment (an alliance of 1 core regional distributors of the company), who acquired 1% equity interest from parentco at a consideration of Rmb1,26.9 mn. Rmb1,135 mn (net of issuance expenses) was raised by issuing mn new shares at Rmb39.16 (unadjusted for bonus shares), for the construction of Hefei manufacturing base and a compressor production factory. Gree Electric Appliance injected Rmb1,219 mn in Zhuhai Gree Group Finance Co., Ltd., raising the effective interest in the Finance Company to 89.25%. The company's third large-scale production base located in Hefei, Anhui Province, was put into operation. The company started to cooperate with Japan Daikin for the development of high-tech key A/C components, such as compressor, motor and module mn new shares were issued at Rmb17.16, raising Rmb3,195 mn (net of issuance expanses) for production capacity expansion. The company announced to recall ~2.25 mn sets of fraudulent dehumidifiers in US and Canada. Zhuhai Municipal Government announced to initiate SOE reforms. The company's ultimate controlling shareholder, Zhuhai SASAC, transferred all stake (51.94%) of Gree Real Estate (6185.SS, NR) held by the parentco to a Zhuhai SASAC's newly setup subsidiary, and plans to dispose of no more than 49% stake in Gree Group to strategic investor(s) through public tender. Source: Company data, Credit Suisse China Home Appliances Sector 64

65 Management profile Executive directors Ms. Dong Mingzhu ( 董明珠 ), Chairman and President Ms. Dong Mingzhu, aged 59, has served as President of the company since April 21, and Chairman of the company since May 212. Since she joined the company in 199, she has served as business manager, vice director and director of sales department, manager, vice general manager, general manager and vice chairman of sales company. At present, she concurrently serves as Chairperson of Gree Group (parentco), Gree Hefei, Gree Wuhan, and Gree Zhengzhou. Since August 212, she has served as Non-Executive Director of Kingdee International Software Group (268.HK, NR). Ms. Dong consecutively served as Deputy to the 1 th, 11 th and 12 th National People's Congresses and concurrently serves as a member of the Central Committee of China Democratic National Construction Association and the 1 th Executive Committee of the All-China Women's Federation, Vice Chairman of China Home Appliances Association, and several senior positions in other organizations and committees. Mr. Huang Hui ( 黄辉 ), Vice President and Chief Engineer Mr. Huang Hui, aged 5, has served as Vice President of the company since August 2, and Chief Engineer of the company since May 27. Mr. Huang is also the Chairman of Zhuhai Gree Dakin Device, Director of Chinese National Engineering Research Center of Green Refrigeration Equipment, Vice President of Guangdong Provincial Institute of Refrigeration, and several senior positions in other organizations and associations. Directors Mr. Meng Xiangkai ( 孟祥凯 ) Mr. Meng Xiangkai, aged 53, Senior Engineer, was appointed as Director of the company in May 214. Mr. Meng started working for Xi'an Aircraft Industry Company (XAC) since July 1982 as an aircraft designer, and was eventually promoted to be the General Manager of XAC. From December 28 to March 21, Mr. Meng served as vice general manager of Xi'an Aircraft International Corporation (768.SZ, NR), vice chairman and president of XAC, and chairman of XAC International. He served as general manager of China Aviation Industry General Aircraft Company (CAIGA) from March 21 to October 211, and chairman of CAIGA from October 211 to March 213. Since May 213, Mr. Meng has served as chairman of AVIC Heavy Machinery Company (6765.SS, NR). Mr. Lu Junsi ( 鲁君四 ) Mr. Lu Junsi, aged 48, has served as Director of the company since May 26. He has served as Director and Vice president of Zhuhai Gree Group from January 24, and was appointed as Vice Chairman in May 212. He is also Chairman of Gree Real Estate since June 28. Mr. Lu served as director of China Civil Engineering Society, executive vice president of Guangdong Provincial Real Estate Association and standing committee member of the 8 th CPPCC National Committee of Zhuhai city. Mr. Zhang Jundu ( 张军督 ) Mr. Zhang Jundu, aged 53, has served as chairman of Zhejiang Tongcheng Gree Electric Appliances since September From November 24, he has served as Chairman of Zhejiang Gree Home Appliances Sales Company. Since August 212, he has concurrently served as general manager of Zhejiang Shengshi Xinxing Gree Trading Company. Mr. Zhang was appointed as director of the company in May 212. China Home Appliances Sector 65

66 Mr. Feng Jiyong ( 冯继勇 ) Mr. Feng Jiyong, aged 42, has been a partner of Beijing Zhong Lun Law Firm since 27. He was appointed as director of the company in May 212. He now serves as a member of All-China Lawyers Association, member of Beijing Lawyers Association and concurrently as Deputy Director of Private Equity and Venture Investment Committee of Beijing Lawyers Association, etc. Independent Directors Dr. Wang Ruzhu( 王如竹 ) Dr. Wang Ruzhu, aged 4, was appointed as Independent Director of the company in May 214. Dr. Wang is a Professor of Mechanical Department of Shanghai Jiaotong University, and the Chairman of the Institute of Refrigeration and Cryogenics of the University. Dr. Tang Guoping ( 唐国平 ) Dr. Tang Guoping, aged 4, was appointed as Independent Director of the company in May 214. Dr. Tang is a Professor of Zhongnan University of Economics and Law, and the Deputy General Director of the Postgraduate School. He concurrently serves as the Independent Director of some other listed companies in China. Mr. He Xiaoyong ( 贺小勇 ) Mr. He Xiaoyong, aged 41, is a Professor of International Economic Law in East China University of Political Science and Law. Since 212, he has served as director of Library of East China University of Political Science and Law. Mr. He concurrently serves as the Independent Director of some other listed companies in China. Supervisors Mr. Xu Chuzhen ( 许楚镇 ), Chairman of Board of Supervisors Mr. Xu Chuzhen, aged 55, served as Managing Director of League Stock Co., Ltd. from 1999 to May 211. From 22 to June 211, he served as managing director and vice chairman of Zhuhai League Environmental Protection Co., Ltd. From August 29 to June 211, he served as chairman of Zhuhai League Investment Co., Ltd. From May 211 to August 211, he served as vice chief engineer of Zhuhai Water Group Co., Ltd. Since September 211, he has served as full-time Director and Supervisor of Zhuhai SASAC. Since May 212, he has served as Chief Supervisor of Zhuhai Port Holdings Co., Ltd (57.SZ, NR) and Chairman of Board of Supervisors of Zhuhai Port Co., Ltd. Since September 213, Mr. Xu has served as the Chairman of Board of Supervisors of the company. Mr. Guo Shuzhan ( 郭书战 ) Mr. Guo Shuzhan, aged 57, has served as Chairman of Hebei Jinghai Guaranteed Investment Co., Ltd since August 26. Since August 212, he has served as General Manager of Henan Shengshi Xinxing Gree Trading Co., Ltd. Mr. Since May 212, he has served as the Supervisor of the company. Mr. Xu Peng ( 许鹏 ) Mr. Xu Peng, aged 34, served as the assistant factory manager in charge of No.4 A/C Manufacturing Factory of the company from March 27 to June 29. From June 29 to October 212, he served as deputy head of HR Department of the company. Since October 212, Mr. Xu has served as Deputy Director of No.1 A/C Manufacturing Factory of the company. Since April 213, he has concurrently served as Vice Chairman of Gree Trade Union Committee. Since July 21, he has served as Staff Representative Supervisor of the company. China Home Appliances Sector 66

67 Senior management Mr. Zhuang Pei ( 庄培 ), Vice President Mr. Zhuang Pei, aged 49, was Assistant President of the company from 22 to April 23. Since April 23, he has served as Vice President of the company. Mr. Wang Jingdong ( 望靖东 ), Vice President, CFO and Board Secretary Mr. Wang Jingdong, aged 43, was the Head of Financial Department, Head of Purchase Department and Chief of Audit Department from November 22 to April 26. From April 26 to September 29, he served as the Assistant President of the company. Mr. Wang was assigned as CFO of the company in January 28, and Board Secretary in July 29. Mr. Chen Weicai ( 陈伟才 ), Vice President Mr. Chen Weicai, aged 41, worked for Huale Police Station in Dongshan District of Bureau of Public Security in Guangzhou from July 1993 to April 28. From July 25 to April 28, he served as Deputy Secretary of Huale Street Party Committee in Dongshan District in Guangzhou. From April 28 to July 213, he served as Deputy Director and Director of Personnel Department of the Bureau of Public Security in Guangzhou. Mr. Chen was appointed as Vice President of the company in September 213. China Home Appliances Sector 67

68 Asia Pacific / China Consumer Electronics Rating OUTPERFORM* Price (22 Oct 14, HK$) 2.5 Target price (HK$) 25.5¹ Upside/downside (%) 24.4 Mkt cap (HK$ mn) 55,34 (US$ 7,95) Enterprise value (Rmb mn) 34,788 Number of shares (mn) 2,684.6 Free float (%) week price range ADTO - 6M (US$ mn) 9.3 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance Research Analysts Eva Wang eva.wang@credit-suisse.com 4 Price (LHS) Rebased Rel (RHS) Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 22/1/14 On 22/1/14 the spot exchange rate was HK$7.76/US$ Performance Over 1M 3M 12M Absolute (%) Relative (%) Haier Electronics Group Co., Ltd. (1169.HK / 1169 HK) COMPANY UPDATE Sustainable growth driven by ICS We reiterate our OUTPERFORM rating on Haier Electronics. Haier Electronics is one of the leading white goods players in China with No. 1 market share in washing machines and water heaters. More importantly, its comprehensive ICS network, which consists of a leading distribution platform in Tier 3/4 markets in China, an extensive logistics network, strong aftersales service capabilities and robustly growing e-commerce platforms, should be a key growth driver in the next few years, in our view. Strong growth driven by third party brands. We believe Haier Electronics will continue to expand its network for third party brands, and gradually open its Goodaymart (RRS) platform to more suppliers and business partners. We expect contribution from third party brands to distribution business to increase to 28% in 216E from 16% in 213, with a CAGR of 32%. Moreover, we expect third-party logistics to benefit from strategic cooperation with Alibaba, acquisition of Shanghai Boyol Logistics, investment in Sinopec Marketing, as well as any potential new cooperation or M&As. Catalysts to drive the share price include: (1) detailed cooperation plans with Sinopec Marketing, which is expected to be disclosed before 214 yearend, and (2) potential logistics M&As, which could expand the product categories and services for the logistics business. In the long term, there is a chance for Haier Electronics to transform to a pure platform operator, with a potential transfer of traditional white appliances manufacturing business. However, there is no timetable for this chance yet. Target price of HK$25.5, implies 24% potential upside. The stock is trading at 15.6x 215E P/E. Our target price of HK$25.5 (unchanged) is based on a 19.1x SOTP-implied 215E P/E. Risks to our call include weaker-than-expected demand for washing machines and water heaters, a slow ramp-up and execution risk for cooperation plans, and slower-thanexpected margin improvement for ICS. Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 62, , , ,947.4 EBITDA (Rmb mn) 2, , , ,489.4 EBIT (Rmb mn) 2, ,96.5 3, ,222.8 Net profit (Rmb mn) 2,36.9 2,42.7 2, ,329.5 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. China Home Appliances Sector 68

69 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan October 214 Focus charts Figure 113: Gross revenue breakdown (213) Figure 114: Net revenue breakdown (213) Washing machines 19% Washing machines 8% Water heaters 1% Water heaters 6% ICS 75% ICS 91% Source: Company data Figure 115: Net revenue and net profit forecasts (Rmbmn) (%) 1, 5 8, 4 6, 3 4, 2 2, E 215E 216E Net revenue Net revenue YoY chg - RHS Net profit YoY chg - RHS Source: Company data, Credit Suisse estimates Source: Company data Figure 116: ICS strong revenue growth (Rmbmn) 9, 8, 7, 6, 5, 4, 3, 2, 1, 25% CAGR in E 215E 216E ICS revenue Source: Company data, Credit Suisse estimates 14% CAGR in E Figure 117: Operating profit breakdown by segment (Rmbmn) (%) 5, 14 Figure 118: Forward P/E band chart HK$ 25. 2x 4, x 3, x 2, 1, E 215E 216E Washing machines Water heaters ICS WM OP margin - RHS WH OP margin - RHS ICS OP margin - RHS x 4x Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates China Home Appliances Sector 69

70 Key assumptions Figure 119: Haier Electronics revenue breakdown Rmb mn E 215E 216E Net revenue Washing machines 4,887 5,198 4,85 5,189 5,656 6,165 Water heaters ,29 1,132 ICS 44,654 49,569 56,551 64,847 74,162 84,65 Total 5,9 55,615 62,263 7,989 8,847 91,947 Gross revenue Washing machines 12,215 13,277 14,222 15,36 16,742 18,249 Water heaters 3,828 4,489 4,358 4,576 4,942 5,436 ICS 45,377 5,769 57,568 66,13 75,495 86,172 Total 61,421 68,535 76,147 85,948 97,179 19,857 Gross revenue YoY % chg Washing machines Water heaters ICS Total % of total gross revenue Washing machines Water heaters ICS Total Source: Company data, Credit Suisse estimates Figure 12: Non-Haier vs Haier brands' under distribution business Rmb mn E 215E 216E 3rd party brands Revenue as % of ICS distribution 13% 16% 2% 24% 28% Revenue 6,86 8,294 11,352 15,121 19,233 YoY% Haier brands - ICS distribution Implied net revenue 4,728 43,544 45,41 47,885 5,74 YoY% Source: Company data, Credit Suisse estimates Figure 121: ICS revenue breakdown Rmb mn Distribution 46,814 51,838 56,762 63,6 69,937 After-sale service ,175 1,586 2,62 Logistics 2,899 3,12 4,33 5,242 6,815 E-commerce 434 1,758 4,43 5,661 7,359 Total ICS 5,769 57,568 66,13 75,495 86,172 YoY % chg Distribution Aftersales service Logistics E-commerce Total ICS Source: Company data, Credit Suisse estimates China Home Appliances Sector 7

71 Figure 122: Haier Electronics income statement Rmb mn E 215E 216E Net revenue 5,9 55,615 62,263 7,989 8,847 91,947 Cost of sales -42,583-46,674-53,126-6,561-69,15-78,489 Gross profit 7,57 8,941 9,138 1,428 11,832 13,459 Other revenue S&D expenses -4,157-4,57-4,44-5,15-5,757-6,444 Admin expenses -1,573-2,46-2,221-2,32-2,577-2,935 Other expenses and losses Operating profit 1,855 2,379 2,626 3,96 3,617 4,223 D&A EBITDA 1,95 2,49 2,756 3,26 3,832 4,489 Finance income Finance costs Share of profit of a JV Extraordinary -16 Profit before taxation 1,854 2,244 2,638 3,159 3,711 4,356 Taxation Profit for the period 1,467 1,77 2,9 2,464 2,931 3,397 Minority interests Profit to equity shareholders 1,47 1,695 2,37 2,43 2,873 3,329 Basic EPS (Rmb) Diluted EPS (Rmb) DPS (HK$) Dividend payout ratio Margins (%) Gross margin Operating margin S&D / Sales Admin / Sales EBITDA margin PBT margin PAT margin Net margin Effective tax rate YoY (%) Net revenue Gross profit EBITDA Operating profit PBT PAT Net profit Diluted EPS ROE (%) ROA (%) Source: Company data, Credit Suisse estimates China Home Appliances Sector 71

72 Figure 123: Haier Electronics balance sheet Rmb mn E 215E 216E Cash & cash equivalents 3,962 5,368 6,824 1,547 12,17 15,63 Pledged deposits Trade & bills receivables 5,581 6,924 7,559 6,639 7,98 8,646 Prepayments and other receivables 871 1,27 1,535 1,735 1,977 2,25 Inventories 2,115 2,479 2,892 3,82 3,725 4,16 Total current assets 12,616 16,41 19,3 22,223 26,9 3,195 PP&E 99 1,39 1,488 2,241 2,95 3,615 Prepaid land lease payments Intangible assets and goodwill Investment in JV entities and others 1,218 1,218 1,218 Other non-current assets ,18 1,82 1,152 Total non-current assets 1,74 2,173 2,851 5,1 5,95 6,755 Total assets 14,356 18,213 21,881 27,233 31,914 36,95 Trade & bills payables 2,551 2,962 3,22 3,435 4,129 4,473 Other payables and accruals 5,327 6,495 7,776 8,858 1,96 11,493 Bank loans Provisions Others current liabilities Total current liabilities 8,989 1,921 12,431 13,65 15,597 17,354 Convertible bonds ,77 1,77 1,77 Other non-current liabilities Total non-current liabilities 1,61 1,452 1,392 2,453 2,461 2,47 Share capital 2,338 2,51 2,762 2,767 2,767 2,767 Reserves 1,687 3,39 4,959 7,966 1,633 13,835 Total shareholders' equity 4,25 5,54 7,721 1,732 13,4 16,62 Minority interests Total liabilities and equity 14,356 18,213 21,881 27,233 31,914 36,95 Source: Company data, Credit Suisse estimates Figure 124: Haier Electronics cash flow statement Rmb mn E 215E 216E Pre-tax profit 1,854 2,244 2,638 3,159 3,711 4,356 Taxes paid ,3 D&A Others Operating cash flow before wc chg 1,49 2,167 2,117 2,592 3,174 3,685 Net change in working capital , Others Operating cash flow 1,31 1,74 2,21 4,457 2,92 4,221 PP&E capex Additions to intangible assets Change in Investments / deposits ,78-1,218 Others Investing cash flow ,654-2,263-1,45-1,45 Dividends paid Share capital Net new borrowings Issue of convertible bonds 874 1,53 Others Financing cash flow , Net change in cash 1,415 1, ,723 1,559 2,956 Source: Company data, Credit Suisse estimates China Home Appliances Sector 72

73 Figure 125: Corporate structure assuming full conversion of CBs to Alibaba and Carlyle Note: Carlyle still holds CBs convertible to 1 mn shares (at HK$1.67 conversion price) and 4 mn ordinary shares converted from warrants in April 214. As of 22 October 214, the company has 2,684.6 mn issued ordinary shares including the 52.4 mn share subscription by Alibaba, but excluding the conversion of CBs and warrants issued to Carlyle and Alibaba; or 2,855.7 mn on fully diluted basis. Source: Company data Figure 126: Haier Electronics' corporate history Time Event Dec-1997 Dec-21 Jan-25 May-26 Sep-26 Dec-27 Jun-28 Sep-29 Mar-21 Aug-21 Jun-211 Aug-211 Nov-211 1H 212 Dec-213 Nov-213 Sep-214 Initial public offering of CCT Multimedia (1169.HK) in HK The listco acquired the mobile phone operation jointly operated by CCT Telecom and Haier Group, and changed the company name to "Haier-CCT Holdings Ltd." The company completed the acquisition of the top-loading washing machine business from Haier Group with a second public equity offering. It changed its name from "Haier-CCT Holdings Ltd." to "Haier Electronics Group Co., Ltd." The company sold the mobile and handset business to Haier Group Haier Group injected its front-loading washing machines and water heaters into the company Haier Group started to participate in the pilot programme of "home appliances to the countryside" Qingdao announced the acquisition of a 2.1% stake in the company from Deutsche Bank The company announced the establishment of a wholly owned subsidiary in Shanghai to expand sales, logistics and networks for Tier 3/4 cities services Haier Group injected Goodaymart into the company and started to develop the ICS business Haier Group injected its logistics business into the company Haier Group injected its after-sales services business and online sales platform (ehaier.com) into the company Carlyle Group became a strategic investor. The company issued CBs convertible to 1 mn shares and 4 mn warrants to Carlyle Group. The company was included in the MSCI China Index Set up the external online sales platform Haier.tmall.com Alibaba Group became a strategic investor in the logistics business of the company under the brand "Goodaymart" with HK$1,857 mn investment. Haier Electronics acquired Shanghai Boyol New Brothers Logistics Services Company ( 上海贝业新兄弟物流有限公司 ) at a consideration of Rmb864 mn. Haier Electronics became one of the 25 investors (total 29.99% stake) in Sinopec Marketing, with a.34% stake and a Rmb1,218 mn investment through its wholly owned subsidiary Foreland Agents. Source: Company data, Credit Suisse China Home Appliances Sector 73

74 Management profile Executive director Mr. Zhou Yun Jie ( 周云杰 ), Chairman and CEO Mr. Zhou Yun Jie, aged 47, has been serving as Executive Director and General Manager of the company since 12 November 29. He joined the Haier Group in 1988 and has over 2 years of experience in sales and enterprise management. Mr. Zhou has been appointed as CEO of the company and resigned as the general manager of the company from 18 March 213. He is also a member of the remuneration committee, nomination committee and strategic committee of the company, and an Alternative President and Deputy Chairman of the board of Haier Group. Mr. Zhou graduated from the Huazhong University of Science and Technology with a Bachelor s degree in Engineering in He has a master s degree in corporate management from the Ocean University of China, and has completed his Doctoral courses with a diploma in Management from the Xian Jiaotong University, the PRC. Non-executive director Mr. Liang Hai Shan ( 梁海山 ) Mr. Liang Hai Shan, aged 47, has served as Executive Director of the company since December 21 and has been re-designated as Non-executive Director with effect from 12 November 29. Mr. Liang was previously mainly responsible for strategic procurement and overall quality control of products of the Group. He is currently responsible for identifying market opportunities and white goods business strategies formulation of the Company. He received a bachelor s degree of Industry from the Xian Jiaotong University, and has 24 years of experience in the manufacture of household electrical appliances, particularly in raw material procurement function and white goods business. He is also an Executive Vice President of Haier Corp, the Chairman and General Manager of Qingdao Haier (669.SS) Ms. Tan Li Xia ( 谭丽霞 ) Ms. Tan Li Xia, aged 43, has been appointed as Non-executive Director with effect from 18 November 213. She joined Haier Group in 1992 and had held the positions as the head of Overseas Market Development of Haier Group and Department of Financial Management of Haier Group. Currently, she is Senior Vice President and CFO of Haier Group, and Vice Chairperson, Senior Vice President and CFO of Qingdao Haier (669.SS). Ms. Tan graduated from Central University of Finance and Economics and has a master's degree in Business Administration from the China Europe International Business School upon completion of the EMBA programme. She is a Fellow of the Chartered Institute of Management Accountants and has been designated as a Chartered Global Management Accountant (CGMA). Ms. Feng Junyuan, Janine ( 冯军元 ) Ms. Janine Junyuan Feng, aged 45, has been appointed as Non-executive Director since 24 August 211. She is also a member of the remuneration committee, nomination committee and strategic committee of the company. Ms. Feng joined the Carlyle Group in 1998; she is currently Managing Director of the Carlyle Group. Ms. Feng has been involved in many direct investments by the Carlyle Group in consumer, financial and industrial companies in the PRC. Prior to joining the Carlyle Group, Ms. Feng worked for Credit Suisse First Boston s New York office, engaging in investment banking business. China Home Appliances Sector 74

75 Dr. Wang Han Hua ( 王汉华 ) Dr. Wang Han Hua, aged 49, was appointed as Non-executive Director effect on 1 June 213. Dr. Wang took position as the CEO of Allyes Information Technology (Shanghai) Co. Ltd., an internet company providing full digital marketing solutions of data, technology and product to its customers, in December 212. Prior to this, Dr. Wang had been the president of Amazon (China) Holding Company Limited from May 25 until November 212 and was responsible for the sale, marketing, cooperation and the construction of B2C E-commerce ecological chain of Amazon in China. Prior to joining Amazon (China) Holding Company Limited, Dr. Wang served a number of positions with Motorola Mobility Technologies (China) Company Limited Beijing branch company between 1998 and 25 including as marketing director, director of strategy and corporate planning, vice president of the Asia Pacific region and general manager of the mobile. He obtained his Doctor of Philosophy degree from the University of Nebraska of the United States in Alternative director Mr. Gui Zhaoyu ( 桂昭宇 ), alternate to Ms. Feng Junyuan, Janine Mr. Gui Zhaoyu, aged 42, has been appointed as Alternate Director to Ms. Janine Junyuan Feng since 24 August 211. Mr. Gui is Director of the Carlyle Group and is focused on Asia buyout opportunities with a particular focus on opportunities in the PRC. Prior to joining the Carlyle Group, Mr. Gui was vice president of the Investment Banking Department at China International Capital Corporation in Beijing, and a Vice President of J.P. Morgan Securities (Asia Pacific) Limited in Hong Kong. He also has working experience at the Special Investment Department of CIC and two state-owned companies, and had founded his own logistics company. Mr. Gui received his MBA degree from Massachusetts Institute of Technology Sloan School of Management. Mr. Li Hua Gang ( 李华刚 ), alternate to Mr. Liang Hai Shan Mr. Li Hua Gang, aged 44, has served as COO since 12 November 29, and has served as Executive Director since 19 April 21. He joined Haier Group in 1991 and has since held a number of senior positions in the sales and marketing functions with his expertise in the sales management in the Tier 3/4 markets of the PRC. Mr. Li graduated from the Huazhong University of Science and Technology in 1991 with a bachelor s degree in economics. Senior management Mr. Xie Ju Zhi ( 解居志 ) Mr. Xie Ju Zhi, aged 48, graduated from Shandong Economics College in 1989 specialised in Economics and Management. He has held senior positions in Electrothermal Product division and East China division of Marketing and Promotion Division of the Haier Group, and served as general manager of the Customer Service Operation Company of the Haier Group since August 22. He has over ten years of experience in service management. Currently, he is mainly responsible for the Group s customer service and channel business expansion of community stores in the 1st and 2nd tier markets. Mr. Diao Yun Feng ( 刁云峰 ) Mr. Diao Yun Feng, aged 42, graduated from the Southeast University in He joined Haier Group in 1995 and has held a number of senior positions including the director of overseas marketing management of the Haier Group and the general manager of Haier International Business Corporation Limited. He has experience in managing domestic small home electric appliances business, particularly has 18 years of experience in overseas market expansion and overseas corporate management. He is currently the director of small home electric appliances division of the Group, and is responsible for the China Home Appliances Sector 75

76 global small home electric appliances segment of the integrated channel services business. Mr. Huang Xiao Wu ( 黄晓武 ) Mr. Huang Xiao Wu, aged 36, was appointed as Deputy General Manager in November 29. Mr. Huang is responsible for assisting General Manager in implementing the Group s corporate development strategy. Mr. Huang has 15 years of extensive experience in banking, investment and corporate finance. Prior to joining the Group, he had worked with a commercial bank and several investment banking firms. Mr. Huang holds a Master s degree in Business Administration from the University of Hong Kong and a Bachelor s degree in Engineering from the University of Chong Qing. Mr. Tao Jun, CFO ( 陶钧 ) Mr. Tao Jun, age 49, has been appointed as CFO since 1 March 213. Prior to joining the Haier Group, Mr. Tao was executive director of a household electrical appliance company listed in Hong Kong, financial director of a joined venture owned by a large state-owned company and a blue chip Hong Kong property company. Mr. Tao has over 2 years of financial management experience in retail, distribution and household electrical appliance business. Mr. Tao also has extensive experience in M&A business as he has worked in investment field over ten years. Mr. Tao has a master's degree in Business Administration from the Murdoch University in Australia and his bachelor's degree in Economics from Zhongnan University of Finance and Law. Mr. Zhan Bo, CFO ( 展波 ) Mr. Zhan Bo, aged 34, has been appointed as General Manager of the finance department since 12 November 213. Mr. Zhan graduated from Tianjin University of Finance and Economics, the PRC, with a bachelor s degree in economics. He joined the Haier Group in 22, and has since held a number of senior financial positions in Haier Group finance department, Haier Europe trading company, Haier Group telecommunication business and Haier Global Marketing department. He has extensive experience in financial management. Mr. Shu Hai ( 舒海 ) Mr. Shu Hai, aged 47, has served as General Manager of washing machine product division since June 29. He joined the Haier Group in 1995 and has since held a number of senior positions in the washing machine business. He is responsible for sales, R&D and production management of the washing machine business of the Group. Mr. Shu has a master s degree in International Trade from Ocean University of China. Mr. Sun Jing Yan ( 孙京岩 ) Mr. Sun Jing Yan, aged 42, had served as Executive Director until August 211 due to the reallocation of appointments within the Haier Group. He joined the Haier Group in 1993 and has since held a number of senior positions in the Electrothermal Appliance Department of the Haier Group. Mr. Sun has over 19 years of extensive experience in the water heater business. He has been General Manager of the Haier Group s Electrothermal Product Division since 25 and is mainly responsible for the operation of the Group s water heater business. Mr. Sun graduated from Shandong Institute of Light Industry in 1993 with a Bachelor in Engineering in Machine Design and Manufacture. Mr. Wang Zheng Gang ( 王正刚 ) Mr. Wang Zheng Gang, aged 41, has served as General Manager of Qingdao Haier Logistics Co., Ltd., since March 23, and has currently served as Director of the logistics division of the Group. He has 17 years of experience in the manufacture of household electrical appliances, particularly in raw material procurement function and logistics business. He is responsible for developing the logistics business of the company and identifying related market opportunities. Mr. Wang graduated from Tianjin University in 1995, and Xian Jiaotong University with a master s degree in Logistics Engineering in 27. China Home Appliances Sector 76

77 Mr. Ren Xian Cun ( 任贤存 ) Mr. Ren Xian Cun, aged 4, joined the Haier Group in 1997 and has held senior positions such as general manager of Haier Air-conditioning in the PRC and the general manager of various regional centres of Haier. He has 17 years of experience in market planning and marketing management in the home electric appliances industry, particularly has professional experience in the operation and management of the home electric appliances channels. He is currently Director of Haier products of the Group, and responsible for Haier products segment of the integrated channel services business. Mr. Ren graduated from Jilin Industrial University in 1997, and obtained his Executive MBA from the University of International Business and Economics in 25. Company secretary Mr. Ng Chi Yin ( 伍志贤 ) Mr. Ng Chi Yin, aged 48, joined the company on 18 March 29 as Company Secretary. He is a fellow member of the Association of Chartered Certified Accountants, and a member of the Hong Kong Institute of Certified Public Accountants and the Institute of Chartered Accountants in England and Wales. He has over 24 years of experience in auditing, finance and company secretarial matters. Mr. Ng graduated from the Faculty of Business Administration of the Chinese University of Hong Kong with a bachelor s degree in business administration. Haier Group (ultimate controlling company) Mr. Zhang Ruimin ( 张瑞敏 ), Founder, Chairman and CEO of Haier Group Mr. Zhang Ruimin, aged 65, is the Founder, Chairman and CEO of Haier Group, and the alternative member of the 16 th, 17 th, and 18 th Central Committees of the Communist Party of China. Mr. Zhang is a world renowned entrepreneur for his remarkable work in turning an insolvent refrigerator manufacturer into one of the world's largest white appliances companies. Mr. Zhang has established the corporate culture of "innovation as the core value", and kept customer-oriented strategy to push forward the corporate to grow continuously. His management philosophy and achievements have attracted wide appraisals globally. Business schools such as Harvard, Spanish IESE business school have included Haier s management cases in their teaching materials. Mr. Zhang has also been granted numerous top awards and honours worldwide, including "Global Top 5 Greatest Leaders" by "FORTUNE" Magazine in 214, the only entrepreneur invited for a presentation on the 73 rd American Academy of Management Meeting in 213, and awarded the "Dale Carnegie Leadership Award in 212. China Home Appliances Sector 77

78 Asia Pacific / China Consumer Electronics Hisense Electric Co., Ltd Rating OUTPERFORM* [V] Price (22 Oct 14, Rmb) 11.2 Target price (Rmb) 13.¹ Upside/downside (%) 18. Mkt cap (Rmb mn) 14,419 (US$ 2,357) Enterprise value (Rmb mn) 11,279 Number of shares (mn) 1,38.48 Free float (%) week price range ADTO - 6M (US$ mn) 44. *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Share price performance Price (LHS) Research Analysts Eva Wang eva.wang@credit-suisse.com Rebased Rel (RHS) 8 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 22/1/14 On 22/1/14 the spot exchange rate was Rmb6.12/US$ Performance Over 1M 3M 12M Absolute (%) Relative (%) (66.SS / 66 CH) INITIATION Leading TV player with innovation edge We initiate coverage with an OUTPERFORM rating and a Rmb13. target price, implying 18% potential upside. Hisense Elec is the largest TV manufacturer in China, with the highest market share in terms of TV sales volume and value in China, according to Display Search and China Market Monitor. We like the company as a consolidator in the domestic market with high product quality and innovation, and an explorer the in overseas market transitioning from an OEM/developing market to an original branding/developed market. A leading player and a consolidator in the domestic market. Hisense Elec's products are characterised by high quality and innovative features, with R&D expenses accounting for c.4% of net revenue, the highest among traditional TV-makers. We believe its leadership position in the domestic market should be secured thanks to its product differentiation. Its performance in the e-commerce channel is also encouraging, as Hisense TV topped both sales volume and value in the Tmall TV category in 9M14, with sales value up 1% YoY, and the new product VIDAA2 Smart TV becoming the bestseller. Branding and profitability are new overseas strategy. Hisense Elec's overseas revenue/gp accounted for 29%/5% of total in 1H14 from 22%/3% in 213. We noticed that its overseas strategy has become more aggressive from OEM to branding and profitability. Its LCD TV global market share has increased to 5.6% in 1Q14 from 5.% in 1Q13, with even better performance in 4K/big screen market, ranking No 2 in the 4K market, No 3 in the 5-54" market and No 2 in the 55-59" market in 1Q14. Valuation and investment risks. Hisense Elec is trading at a 9.3x 215E P/E. Our target price of Rmb13. (implying 18% potential upside) is based on 11.x 215E P/E, generally in line with key industry players' five-year average forward P/E of 11x. Catalysts for the stock include improving profitability in export market and increasing smart TV penetration. Downside risks include a slowdown in TV demand and fierce competition. Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 28,379. 3, , ,436. EBITDA (Rmb mn) 1,89.2 1,63.4 1, ,56.6 EBIT (Rmb mn) 1, , , ,814.4 Net profit (Rmb mn) 1, , , ,713. EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. China Home Appliances Sector 78

79 Focus charts Figure 127: Gross revenue breakdown (213) Figure 128: Geographic breakdown (213) Other multimedia products 2% Non-core business 7% Export +8.7% YoY Export Rmb5,798 mn 22% TV and multimedia products 91% Domestic Rmb2,672 mn 78% Domestic +15.6% YoY Source: Company data Figure 129: Net revenue and net profit forecast (Rmbmn) (%) 4, , 6 2, 3 1, E 215E 216E Net revenue Net revenue YoY chg - RHS Net profit YoY chg - RHS Recurring net profit YoY chg - RHS Source: Company data, Credit Suisse estimates Figure 131: Domestic TV market share (%) 2 Source: Company data Figure 13: ASP of TV products (US$) (%) Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 China TV ASP YoY chg - RHS Source: DisplaySearch Figure 132: Forward P/E band chart Rmb x 12x 1x 8x 6x Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14. Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: DisplaySearch Source: Company data, Credit Suisse estimates China Home Appliances Sector 79

80 Key assumptions Figure 133: Gross revenue breakdown Rmb mn E 215E 216E TV and multimedia products 21,341 22,38 25,898 27,43 29,18 3,941 Other multimedia products Non-core business 1,77 2,38 2,1 2,312 2,659 3,58 Total gross revenue 23,524 25,252 28,48 3,31 32,399 34,558 YoY % chg TV and multimedia products Other multimedia products Non-core business Total gross revenue % of total TV and multimedia products Other multimedia products Non-core business Total gross revenue Source: Company data, Credit Suisse estimates Figure 134: Gross profit breakdown Gross margin on gross revenue (%) E 215E 216E TV and multimedia products Other multimedia products Non-core business Gross margin on gross revenue GP incl. business tax (Rmb mn) TV and multimedia products 4,765 4,338 4,938 4,855 5,267 5,647 Other multimedia products Non-core business Gross profit incl. business tax 4,99 4,55 5,13 5,3 5,475 5,99 YoY % chg TV and multimedia products Other multimedia products Non-core business Gross profit incl. business tax % of total TV and multimedia products Other multimedia products Non-core business Gross profit incl. business tax Source: Company data, Credit Suisse estimates China Home Appliances Sector 8

81 Figure 135: Hisense Electric income statement Rmb mn E 215E 216E Net revenue 23,417 25,185 28,379 3,194 32,284 34,436 Cost of sales -18,614-2,72-23,376-25,271-26,924-28,649 Gross profit 4,83 4,483 5,3 4,923 5,361 5,787 S&D expense -2,485-2,123-2,51-2,661-2,845-3,35 Admin expense Operating income 1,847 1,796 1,729 1,439 1,636 1,814 EBITDA 2,25 1,944 1,89 1,63 1,853 2,57 Net finance income FX gains / asset impairment Share of profit from associates and JV Investment gain Net non-operating income Profit before taxation 1,965 1,912 1,87 1,64 1,833 2,24 Taxation Profit for the period 1,712 1,631 1,623 1,392 1,591 1,757 Minority interests Profit to equity shareholders 1,689 1,63 1,583 1,358 1,551 1,713 Basic EPS (Rmb) Diluted EPS (Rmb) DPS (Rmb) Dividend payout ratio (%) Net recurring profit 1,625 1,524 1,484 1,274 1,467 1,628 Non-recurring items Recurring basic EPS (Rmb) Recurring diluted EPS (Rmb) Margins (%) Gross margin Operating margin S&D / Sales Admin / Sales EBITDA margin PBT margin Net margin Recurring net margin Effective tax rate YoY (%) Revenue Gross profit EBITDA Operating profit PBT Net profit Recurring net profit Diluted EPS ROE (%) ROA (%) Source: Company data, Credit Suisse estimates China Home Appliances Sector 81

82 Figure 136: Hisense Electric balance sheet Rmb mn E 215E 216E Cash & cash equivalents 2,766 1,553 2,96 3,147 3,675 4,26 Trade and bills receivables 9,267 9,924 11,325 11,498 12,898 13,125 Inventories 2,28 3,6 3,77 3,828 3,364 4,448 Prepayments & others Total current assets 14,355 15,125 17,42 18,592 2,63 21,914 PP&E 1,6 1,285 1,434 1,562 1,73 1,82 CIP & Investment property Intangible assets Long-term equity investment Others 324 1, Total non-current assets 1,79 3,126 2,447 2,727 3,8 3,229 Total assets 16,145 18,251 19,867 21,319 23,72 25,143 Trade and bills payable 5,589 5,958 6,656 7,191 7,561 8,137 Advances from customers Tax and other payable 2,358 2,343 2,276 2,24 2,395 2,554 Others Total current liabilities 8,86 9,223 9,633 1,171 1,74 11,52 Total non-current liability Share capital 869 1,37 1,38 1,38 1,38 1,38 Reserves 6,299 7,478 8,58 9,46 1,63 11,851 Total shareholders' equity 7,167 8,784 9,888 1,768 11,912 13,16 Minority interests Total liabilities and equity 16,145 18,251 19,867 21,319 23,72 25,143 Source: Company data, Credit Suisse estimates Figure 137: Qingdao Hisense cash flow statement Rmb mn E 215E 216E Pre-tax profit 1,965 1,912 1,87 1,64 1,833 2,24 Tax received /(paid) D&A Investment gains Others Operating cash flow before w/c chg 2,2 1,61 1,722 1,327 1,683 1,861 Net change in working capital -1,25-1, Others Operating cash flow ,34 1,78 1,38 1,321 PP&E capex Change in investments Others Investing cash flow -35-1, Dividend paid Capital injection Others Financing cash flow Net change in cash 337-1,29 1, Source: Company data, Credit Suisse estimates China Home Appliances Sector 82

83 Figure 138: Hisense Electric's corporate structure Source: Company data Figure 139: Hisense Electric's corporate history Time Event Dec 1996 Qingdao Society of Economic Reform approved Hisense as the initiator to construct Qingdao Hisense Electric as a limited corp. Mar 1997 Approved by CSRC, Hisense Group subscribed 2 mn shares (as state-owned legal person), and offered 7 mn RMB ordinary shares to the public. Total share capital amounted to 27 mn shares. Apr 1997 Qingdao Hisense Electric Co Ltd was officially founded, 63 mn public shares were listed in SSE (7 mn shares allotted to company employees were listed in Oct 1997) Approved by CSRC, the company offered 1:3 rights issue. Hisense Group subscribed c.5.7 mn shares, and public shareholders subscribed 21 mn. Total share capital reached mn shares. Jun 1999 Capitalized capital reserve of four shares on each ten shares to shareholders. Total share capital reached mn shares. Dec 2 Jun 26 Sep 28 Jun 29 Dec 29 May 21 Jun 21 Dec 21 Approved by CSRC, the company offered 1:6 rights issue. Hisense Group subscribed 2.84 mn shares, and the public subscribed mn shares. Total share capital reached mn shares. Reform of non-tradable shares completed. Non-tradable shareholders paid 2.5 share/1 shares to tradable shareholders, or in total 5.96 mn shares. Total share capital remained at mn shares. Qingdao Hisense Electronic Industry Holding Co Ltd (connected party of Hisense Group) increased holding by 9.87 mn shares, or 2% of total share capital. The restricted shares from reform of non-tradable shares became unrestricted. Private placement of 84 mn shares, lock-up period until 24 Dec 21. Total share capital reached mn shares. Capitalized capital reserve of five shares on each ten shares to shareholders. Total share capital reached mn shares, among which mn shares were unrestricted, and 126 mn shares were restricted. Qingdao Hisense Electronic Industry Holding Co Ltd increased holding by 3.68 mn shares, or.42% of total share capital. All restricted shares became unrestricted. 211 First batch of stock option incentive plan (2.22 mn shares) got exercised and listed in July 211. Total share capital reached mn shares. Dec 211 Qingdao Hisense Electronic Industry Holding Co Ltd increased holding by mn shares, or 1.48% of total share capital. Jul 212 Capitalized capital reserve of 5 shares on each 1 shares to shareholders. Total share capital reached 1,33.31 mn shares. 212 Second batch of stock option incentive plan (3.33 mn shares) got exercised, and listed in Sep 212. Total share capital reached 1,36.65 mn shares. 213 Hisense Group divested 9.44 mn shares of the company, or.72% of total shares. 213 Qingdao Hisense Electronic Industry Holding Co Ltd increased holding by mn shares, or 1.73% of total share capital. 213 Third batch of stock option incentive plan (1.84 mn shares) got exercised, and listed in Dec 213. Total share capital reached 1,38.48 mn shares. 214 Qingdao Hisense Electronic Industry Holding Co Ltd increased holding by 3.56 mn shares, or.27% of total share capital. Source: Company data, Credit Suisse China Home Appliances Sector 83

84 Management profile Executive directors Ms. Yu Shu Min ( 于淑珉 ), Chairman of Board Ms. Yu Shu Min, aged 62, has been Chairman of the Board of Directors of Hisense Electric since December 1999, Vice Chairman of the Board of Directors and president of Hisense Group since July 21, and Director of Hisense Kelong since June 26. Mr Zhou Hou Jian ( 周厚健 ) Mr Zhou Hou Jian, aged 57, has been Director of Hisense Electric and Chairman of the Board of Directors of Hisense Group. He also held managerial roles in Qingdao Television Company, Qingdao Electronic Device Company. Mr Liu Hong Xin ( 刘洪新 ), General Manager Mr Liu Hong Xin, aged 47, has been General Manager of Hisense Electric since January 26, and Chairman of the Board of Directors since June 26. He also held a managerial role in the marketing company of Hisense Electric and had extensive work experience in Hisense Electric's subsidiaries in Xian, Zhenzhou, and Guiyang. Mr. Lin Lan ( 林澜 ) Mr. Lin Lan, aged 56, has been Director of Hisense Electric since May 27. He has also been Director of Hisense Kelong since June 26, and Vice President and Director of Hisense Group since July 26 and December 29, respectively. He worked as manager of the power system software development department of Siemens AMEC Limited in the UK, senior project manager and senior engineer of GE Power Systems Co. Mr. Xiao Jian Lin ( 肖建林 ) Mr. Xiao Jian Lin, aged 46, has been Director of Hisense Electric since Jun 28. He has also served as Director and President of Hisense Kelong since January 211 and March 214, respectively; and as director of Hisense Group, and Hisense Air-Conditioning since January 2 and April 29, respectively. From 27 to 214, he served in different positions in Hisense Group as head of audit department, vice-president, head of finance and operation management centre, to name a few. Non-executive independent directors Mr. Ma Jin Quan ( 马金泉 ) Mr. Ma Jin Quan, aged 71, has been Independent Non-executive Director of Hisense Electric since May 29. Mr Xu has also served as independent director for China XD Electric Co Ltd (61179.CH). He was general manager of IRICO Group Corp (an SOE). Mr. Li Shu Feng ( 李书锋 ) Mr. Li Shu Feng, aged 49, had been Independent Non-executive Director of the company since May 29, but resigned in June 214. He has also acted as an Independent Director for Tianjin Good Hand Railway Holdings Co Ltd (594.CH). Mr Li is Professor of Minzu University of China, and focuses on teaching and research in accounting and financial management. Mr. Han Ting Chun ( 韩廷春 ) Mr. Han Ting Chun, aged 52, has acted as Independent Non-executive Director of Hisense Electric since May 29. Mr Han is a professor and Ph.D supervisor of Tsing Hua University, and focuses on teaching and research of economics. China Home Appliances Sector 84

85 Supervisors Mr. Wang Zhi Hui ( 王芝辉 ), Chairman of Board of Supervisors Mr. Wang Zhi Hui, aged 57, has served as Supervisor of Hisense Electric since Mar 211. He has been the Head of human resources department of Hisense Group since 28, and Executive Vice President of Hisense Institute since July 211. Ms. Luo Zhi Guo ( 罗志国 ) Ms. Luo Zhi Guo, aged 34, has served as Supervisor of Hisense Electric since March 211. She has also been Deputy Head of audit department of Hisense Group since February 211. Ms. Liu Ping ( 刘萍 ) Ms. Liu Ping, aged 34, has been Supervisor of Hisense Electric since April 213. She has also served as General Manager of finance department of Hisense Electric since 213 and Deputy Head of finance and business administrative department since September 213. Senior management Mr. Dai Hui Zhong ( 代慧忠 ) Mr. Dai Hui Zhong, aged 48, has served as Deputy Manager of Hisense Electric since April 213. He used to serve as the assistant to general manager, general manager of molding department, and general manager of procurement centre of Hisense Electric. Mr. Gao Yu Ling ( 高玉岭 ) Mr. Gao Yu Ling, aged 48, has been Deputy Manager of Hisense Electric since April 213. He used to serve as general manager of quality promotion department and research head of research institute of Hisense Group. Mr. Liu Wei Dong ( 刘卫东 ) Mr. Liu Wei Dong, aged 47, has been the deputy manager of Hisense Electric since Apr 213. He is a senior scientist and used to serve as the assistant to general manager of Hisense Electric. Ms. Liu Jiang Yan ( 刘江艳 ) Ms. Liu Jiang Yan, aged 38, has been Deputy Manager of Hisense Electric since April 213. She used to serve as the audit manager of finance department of Hisense Group, finance manager of Qingdao Hisense Import and Export Co Ltd, vice president of finance department and human resources department of Hisense Electric. Mr. Liu Xin ( 刘鑫 ), Chief Accountant Mr. Liu Xin, aged 39, has been Chief Accountant of Hisense Electric since March 211. He has held a managerial role in the company's finance department since 27. Ms. Wang Dong Bo ( 王东波 ), Board Secretary Ms. Wang Dong Bo, aged 37, has been Secretary to the board of directors since April 213. She also worked as the head of securities department of the company and as the head of legal affairs of Hisense Air-Conditioning. China Home Appliances Sector 85

86 Asia Pacific / China Consumer Electronics TCL Corporation Rating OUTPERFORM* Price (22 Oct 14, Rmb) 2.92 Target price (Rmb) 3.6¹ Upside/downside (%) 23.3 Mkt cap (Rmb mn) 27,61 (US$ 4,511) Enterprise value (Rmb mn) 46,147 Number of shares (mn) 9, Free float (%) week price range ADTO - 6M (US$ mn) 79.1 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance Price (LHS) Research Analysts Eva Wang eva.wang@credit-suisse.com Rebased Rel (RHS) Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 22/1/14 On 22/1/14 the spot exchange rate was Rmb6.12/US$ Performance Over 1M 3M 12M Absolute (%) Relative (%) (1.SZ / 1 CH) INITIATION Vertical integration forges new growth drivers We initiate coverage with an OUTPERFORM rating and a Rmb3.6 target price, implying 23% upside potential. TCL Corp is a multimedia conglomerate with a vertically integrated business model, ranging from upstream LCD panel production to downstream consumer appliances products sales. Although the growth of its TV business decelerates amid fierce competition, we believe growth of its CSOT unit and telecommunication business should become the new drivers of future growth. CSOT is the key driver of earnings growth. CSOT is the panel production unit of TCL Corp. With its first 8.5-G TFT-LCD (T1) line came at full speed in 213, it contributed 19% of TCL Corp's total revenue and 27% of EBIT in 1H14. There are two more lines under construction currently, one being an upgraded version of 8.5G TFT-LCD (T2) line mainly for 55'' screen, in order to capture large screen trend in TV industry; the other being a 5% owned 6- G LTPS-LCD (T3) line for 4-12'' screen to capture the mobile/tablet growth trend. With first phases of T2/T3 line expected to commence production in 1H15/1H16, we estimate CSOT should contribute 18-27% of total revenue, and its EBIT contribution should be even higher, with 29-4% of total in E, at a three-year EBIT CAGR of 39%. Telecommunications unit is another driver of growth in smartphones. We estimate the telecoms business will account for 24-3% of total revenue, and 36-4% of total EBIT (at a 3Y EBIT CAGR of 24%) in E as its smartphone business rises from a relatively low base. Valuation and investment risks. TCL Corp is trading at 1.3x 215E P/E. Our target price of Rmb3.6 (implying 23% potential upside) is based on 12.5x 215E P/E, a premium to key industry players' five-year average forward P/E of 11x, due to its high growth potential from vertical integration. Catalysts for the stock include a gradual ramp-up of panel production capacity and growth of the smartphone industry. Downside risks include an unexpected delay in CSOT projects and EPS dilution from share placement. Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 85, , , ,574.8 EBITDA (Rmb mn) 4, , , ,712.8 EBIT (Rmb mn) 1, ,96.4 3,94.4 5,11.8 Net profit (Rmb mn) 2,19.1 3,47.5 3, ,992.4 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. China Home Appliances Sector 86

87 Focus charts Figure 14: Revenue breakdown of major segments (213) Figure 141: PAT breakdown of major segments (213) Taikeli 4% Tonly 4% Hanlinhui 13% TCL Multimedia 35% Tonly 4% Home appliance 4% Taikeli 3% Hanlinhui 7% TCL Communication 8% Home appliance 1% CSOT 17% TCL Communication 17% CSOT 74% Source: Company data Figure 142: Geographic breakdown (213) Note: TCL Multimedia was in loss in 213. Source: Company data Figure 143: Domestic TV market share (%) 2 Export +37.8% YoY 15 Export Rmb35,371 mn 42% Domestic Rmb48,341 mn 58% Domestic +12.7% YoY 1 5 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 Source: Company data Figure 144: Net revenue and net profit forecasts (Rmbmn) (%) 15, , 2 9, 15 6, 1 5 3, E 215E 216E Net revenue Net revenue YoY chg - RHS Net profit YoY chg - RHS Recurring net profit YoY chg - RHS Source: Company data, Credit Suisse estimates Source: DisplaySearch Figure 145: Forward P/E band chart Rmb Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: Company data, Credit Suisse estimates 15x 13x 11x 9x 7x China Home Appliances Sector 87

88 Key assumptions Figure 146: Gross revenue breakdown Rmb mn E 215E 216E Multimedia 27,252 29,352 31,457 3,88 32,238 33,515 Mobile 8,813 9,774 15,295 23,786 31,894 38,59 CSOT 131 7,237 15,531 18,19 23,232 32,159 Home appliances 6,53 7,672 9,323 9,67 1,24 1,93 Tonly 2,948 3,626 4,17 4,795 5,515 Taikeli 2,61 2,629 3,669 5,54 6,65 7,596 Hanlinhui 12,293 12,962 12,425 13,46 13,698 14,383 Non-core businesses 1, ,611 1,45 1,35 1,175 Others & eliminations 2,477-3,85-7,433-8,768-9,624-1,56 Total gross revenue 6,834 69,629 85,54 97, , ,33 YoY % chg Multimedia Mobile CSOT. 5, Home appliances Tonly n.a. n.a Taikeli Hanlinhui Non-core businesses Total gross revenue % of total Multimedia Mobile CSOT Home appliances Tonly n.a Taikeli Hanlinhui Non-core businesses Others & eliminations Total gross revenue Source: Company data, Credit Suisse estimates Figure 147: Gross margin based on gross revenue breakdown % E 215E 216E Multimedia Mobile CSOT Home appliances Tonly Taikeli Hanlinhui Non-core businesses Gross margin on gross revenue Source: Company data, Credit Suisse estimates China Home Appliances Sector 88

89 Figure 148: TCL Corporation income statement Rmb mn E 215E 216E Net revenue 6,38 69,219 85,38 97, ,76 132,575 Cost of sales -51,121-58,124-7,395-8,252-93,719-19,27 Gross profit 9,259 11,96 14,642 16,99 2,41 23,368 S&D expenses -5,457-6,583-8,81-8,793-1,295-11,998 Admin expenses -2,8-3,839-4,997-5,19-5,85-6,358 Operating profit 1, ,565 3,96 3,94 5,12 EBITDA 1,797 2,938 4,945 7,154 9,469 11,713 Net finance expenses ,1-1,15 FX gains / asset impairment Share of profit of associates and JVs Investment income / fair value change Net non-operating income 822 1,397 2,353 2,558 2,185 2,21 Profit before taxation 2,43 1,64 3,628 4,941 5,531 6,591 Taxation Profit for the period 1,671 1,273 2,885 4,249 4,757 5,668 Minority interests ,21-1,289-1,676 Profit to equity shareholders 1, ,19 3,47 3,468 3,992 Basic EPS (Rmb) Diluted EPS (Rmb) DPS (Rmb) Dividend payout ratio (%) Reported recurring net profit ,95 2,526 3,29 Non-recurring items ,2 1, Recurring basic EPS (Rmb) Recurring diluted EPS (Rmb) Margins (%) Gross margin Operating margin S&D / Sales Admin / Sales EBITDA margin PBT margin Net margin Effective tax rate YoY (%) Net revenue Gross profit EBITDA Operating profit -2, PBT Net profit Recurring net profit Diluted EPS ROE (%) ROA (%) Source: Company data, Credit Suisse estimates China Home Appliances Sector 89

90 Figure 149: TCL Corporation balance sheet Rmb mn E 215E 216E Cash & cash equivalents 21,368 17,798 12,318 7,399 8,38 12,429 Bank WMP and fixed income fund 1,2 1,863 1,748 4,518 4,518 4,518 Trade and bills receivables 13,359 14,677 15,765 19,372 21,145 24,621 Inventories 8,472 11,956 12,183 12,442 15,288 17,25 Prepayments and other current assets 3,825 4,885 5,915 6,826 6,427 6,738 Total current assets 48,223 51,179 47,929 5,558 55,758 65,331 PP&E 1,559 21,336 2,361 26,29 37,466 35,511 Construction in progress 1, ,723 2,523 2,823 Intangible assets, R&D, and goodwill 2,367 2,959 3,167 3,435 3,72 3,977 Long term equity investment 1,416 1,953 3,185 3,8 2,995 2,928 Other non-current assets 952 1,357 2,516 3,495 3,132 3,411 Total non-current assets 25,791 28,566 3,152 38,23 49,818 48,65 Total assets 74,14 79,745 78,81 88,581 15, ,981 Trade and bills payables 14,263 17,459 16,113 19,66 22,16 25,257 Customer deposits 1,159 1,736 1,379 1,263 1,479 1,723 Tax and other payables 8,484 8,497 1,119 1,716 12,376 14,257 Short-term bank borrowings 13,369 12,474 8,6 11,9 11,9 11,9 Others current liabilities 831 5, ,49 1,49 1,49 Total current liabilities 38,16 45,246 37,15 43,995 48,821 54,187 Long term bank borrowings & corporate bonds 15,36 12,714 14,627 14,45 17,551 17,826 Other non-current liabilities 1,265 1,552 6,346 4,782 3,597 1,387 Total non-current liabilities 16,625 14,266 2,972 18,827 21,148 19,213 Share capital 8,476 8,476 8,531 9,452 12,18 12,18 Reserves 2,829 3,27 5,637 9,316 15,147 18,446 Total shareholders' equity 11,36 11,746 14,168 18,768 27,327 3,626 Minority interests 7,978 8,487 5,79 6,991 8,28 9,956 Total liabilities and equity 74,14 79,745 78,81 88,581 15, ,981 Source: Company data, Credit Suisse estimates Figure 15: TCL Corporation cash flow statement Rmb mn E 215E 216E Pre-tax profit 2,43 1,64 3,628 4,941 5,531 6,591 Taxes paid D&A 795 2,264 3,38 4,58 5,529 6,71 Associate and investment gains Others Operating cash flow before w/c chg 1,962 2,761 7,87 7,865 9,676 11,648 Net change in working capital ,34-1, Others ,5 1, Operating cash flow 67 2,49 3,698 3,829 1,282 11,491 PP&E capex -15,841-5,497-3,768-1,8-17,35-4,9 Decrease (Incr.) in Investments -1,9-1, Others Investing cash flow -16,28-6,28-4,94-11,455-16,714-4,812 Dividends paid Share issuance 74 2,64 5,71 Net new borrowings 12,39 1,44 3,174 2,719 3, Others ,817-1,563-1,185-2,21 Financing cash flow 11,942 1, ,78 7,412-2,629 Net change in cash -3,596-2, , ,5 Source: Company data, Credit Suisse estimates China Home Appliances Sector 9

91 Figure 151: TCL Corporation's structure Source: Company data Figure 152: TCL Corporation's history Time Event 1981 TCL Corp was founded in Huizhou, producing recording tapes TCL Corp set up a JV called TCL Telecommunication Equipment Company with a HK enterprise to manufacture telephones TCL Corp started to design and develop colour TVs. 22-Sep Nov-1999 Nov-23 Apr-24 TCL Telecom Equipment (formerly 542.SZ) was listed in Shenzhen Stock Exchange. TCL Corp's another subsidiary TCL International Holdings (17.HK) raised ~HK$1 bn in its HK IPO. TCL Int'l mainly operated multimedia and PC businesses. TCL Corp and Thomson SA of France announced the creation of a 67%:33% JV to produce TVs and DVD players. TVs made by TCL-Thomson would be marketed under TCL brand in Asia and the Thomson and RCA brands in Europe and North America. TCL Corp and Alcatel announced the creation of a 55%:45% mobile phone manufacturing JV, Alcatel Mobile Phones TCL Corp executed significant corporate restructuring in 23 and 24. TCL Corp merged TCL Telecom Equipment (formerly 542.SZ) by means of new share issuance and share exchange, and got listed on Shenzhen Stock Exchange on 3 Jan 24 (ticker 1.SZ). TCL Telecom Equipment (formerly 542.SZ) was delisted. TCL Corp's HK listed subsidiary TCL Int'l (17.HK) spinned off its 4.8% stake in TCL Communication; the latter was then listed in HK by way of introduction on 27 Sep 24 (ticker 2618.HK). TCL Int'l was renamed as TCL Multimedia (17.HK). May-25 TCL Comm (2618.HK) acquired Alcatel's 45% stake in the mobile phone JV for a consideration of US$8.1 mn worth of its shares. Apr-29 TCL Corp (1.SZ) raised Rmb95 mn by placing 35.6 mn new shares at Rmb2.58 per share (unadjusted) for its LCD module project. Nov-29 TCL Corp (1.SZ) and Shenzhen Shenchao Technology Investment formed a 5:5% JV - CSOT, to construct an 8.5- Generation LCD panel production line (t1 project) with total capex of Rmb24.5 bn. Aug-21 TCL Corp (1.SZ) raised Rmb4.5 bn by placing ~1,32 mn new shares at Rmb3.46 per share (unadjusted) for CSOT t1 project, which was put into operation in August 211 Sep-213 Shenchao sold 3% equity interest in CSOT to TCL Corp (1.SZ) at a consideration of Rmb3, mn. Including additional capital injection, TCL Corp's (1.SZ) interest in CSOT increased to 85%. Aug-213 TCL Multimedia (17.HK) spinned off Tonly Electronics, which was listed on 14 August 213 (ticker 1249.HK). Oct-213 TCL Corp (1.SZ) announced to construct the second 8.5-Generation LCD panel production line (t2 project) with total capex of Rmb24.4 bn, which is set to launch in two phases starting from mid-215. Jan-214 TCL Corp (1.SZ) disposed of its residential property development business to Fantasia (1777.HK) and acquired 15% equity interest in Fantasia. Apr-214 TCL Corp (1.SZ) announced to form a 5:5 JV with Wuhan Technology Investment to construct a 6-Generation LCD panel production line (t3 project) with total capex of Rmb16 bn. Apr-214 TCL Corp (1.SZ) raised Rmb2 bn by placing ~917.3 mn new shares at Rmb2.18 per share for CSOT acquisition from Shenchao. Aug-214 TCL Corp (1.SZ) announced to inject Rmb6 bn capital to CSOT, after which its stake will increase to TCL Corp (1.SZ) proposed to raise another Rmb5.7 bn by placing ~2,728 new shares at Rmb2.9 per share. Source: Company data, Credit Suisse China Home Appliances Sector 91

92 Management profile Executive directors Mr. Li Dong Sheng ( 李东生 ), Chairman and CEO Mr. Li Dong Sheng, aged 56, has been Chairman and CEO of TCL Corporation since 23. He founded TCL brand and became general manager of TCL Telecommunication Equipment Company in 1985, and has been part of top management of TCL since then. Mr Li graduated from South China University of Technology in 1982, and entered the TTK Home Appliances Co Ltd, the predecessor of TCL. Mr Li was a Representative to the sixteenth National Congress of Communist, and to the tenth, eleventh, and twelfth NPC. He also held leading roles in various professional bodies such as Head of China Video Industry Association and Deputy Head of China Chamber of International Commerce. Ms. Yang Xiao Peng ( 杨小鹏 ), Vice Chairman Ms. Yang Xiao Peng, aged 47, has been Vice Chairman of TCL Corporation since June 211. He has also acted as chairman and general manager of Huizhou Investment Holdings Co Ltd, the largest shareholder of TCL Corporation. Mr. Yang holds a bachelor's degree in Business Administration of Tianjin Business School. Dr. Han Fang Ming ( 韩方明 ), Vice Chairman Mr. Han Fang Ming, aged 47, joined TCL Corporation in 1999, and has been Vice Chairman of TCL Corporation since June 211. He has also acted as general manager and chairman of the Board of Directors. Dr. Han holds a PhD degree in Peking University, and was a post-doctoral fellow at Harvard University. Dr. Han was a committee member of the tenth, eleventh and twelfth CPPCC, and currently the Deputy Director of the Foreign Affairs Committee of the CPPCC and convenor of the Public Diplomacy Group. Dr. Bo Lian Ming ( 薄连明 ), COO Dr. Bo Lian Ming, aged 5, joined TCL in 2, and has served as Director and COO of the company since June 211. Dr. Bo also concurrently serves as several senior roles in TCL Corporation's subsidiaries, including the Executive Director of TCL Multimedia (17.HK, NR), Director of China Star Optoelectronics, Chairman of Highly Information Industry, Chairman of TCL Education Online, etc. Dr. Bo holds a PhD degree of Xi'an Jiao Tong University. Mr. Huang Xu Bin ( 黄旭斌 ), CFO Mr. Huang Xu Bin, aged 48, Senior Economist, joined TCL in 21, and has been CFO of the company since June 211, and Director since July 213. Mr. Huang also concurrently serves as several senior roles in TCL Corporation's subsidiaries, including Director of TCL Multimedia (17.HK, NR), Director of TCL Communication (2618.HK), Director of Techne Corporation, Chairman of TCL Corporation Finance Company, Director of Shenzhen TCL Property Company, Director of Huizhou TCL Home Appliances Company, etc. Mr. Huang graduated from Hunan University and holds a Master's Degree in Economy and EMBA degree from China Europe International Business School. Ms Gui Song Lei ( 桂松蕾 ) Ms Gui Song Lei, aged 36, is Director of the company. She has served as Vice President of Zhongzhi Enterprise Group since 28, Chairman of SSGA Fund since 213, and Independent Director of Beijing SPC Environment Protection Tech Company (2573.SZ, NR). Ms. Gui holds a master's degree. China Home Appliances Sector 92

93 Independent directors Dr. Ding Yuan ( 丁远 ) Dr. Ding Yuan, aged 44, serves as Independent Director of the TCL Corporation. Dr. Ding holds a PhD in Accountancy from Management School of France Bordeaux IV University, and MBA from France Poitiers University. Currently Dr. Ding is a Professor of China Europe International Business School. Mr. Chen Sheng Tian ( 陈盛沺 ) Mr. Chen Sheng Tian, aged 65, is President of Taiwan New Treasure Group and Independent Director of the company. Mr Chen Cheng concurrently serves as Honorary Chairman of Taiwan Ruizhi Precision Company, and Chairman of Shandong Zhongliansheng international Logistics. Mr. Ding holds a Master's degree in Civil Engineering from the University of Utah. Mr. Ying Wu Mr. Ying Wu, aged 53, is Chairman of Zhongze Jiameng Investment Fund and an Independent Director of the company. Mr. Ying holds a master's degree from New Jersey Institute of Technology. He joined Bell Laboratory in 1987, served as senior researcher and project manager at Bellcore Laboratories, responsible for research of pioneer technology in personal communication services and multimedia. He set up Starcom Company in 1991, and served as Chairman and CEO of UT STARCOM (China) Company from 1995 to 27. Supervisors Mr. Yang Xing Hua ( 杨杏华 ), Chairman of Board of Supervisors Mr. Yang Xing Hua, aged 54, Senior Economist, is Chairman of Board of Supervisors. Mr. Yang has served in Huizhou Municipal Economic Reform Committee, Economic and Trade Bureau, responsible for management of economic reforms and development. He is currently Deputy Investigator of Huizhou Municipal Economic and Informatisation Bureau. Ms. Mi Xin Bing ( 米新滨 ) Ms. Mi Xin Bing, aged 49, joined TCL in 1996, and has been served as Staff Representative Supervisor, the company's Party Committee members, President of Labour Union, Deputy Secretary of Disciplinary Inspection Committee, and Minister of Supervisory Department. Mr. Liu Bing ( 刘斌 ) Mr. Liu Bing, aged 44, has served as Deputy General Manager of Huizhou Investment Holdings Co Ltd, the largest shareholder of TCL Corporation, and Supervisor. Senior management Mr. Zhao Zhong Yao ( 赵忠尧 ), Senior Vice President Mr. Zhao Zhong Yao, aged 5, is Senior Vice President and former Executive Director of TCL Corporation. He joined TCL in 1991, and has over 2 years of experience in sales and marketing and management of consumer electronics business. He currently holds the position of Chairman of Huizhou Techne and Huizhou Sheng Hua Industrial Company. Mr. Zhao graduated with a master s degree in Engineering from Northwestern Polytechnic University. He also obtained a master s degree in Business Administration from Massachusetts Institute of Technology in 27. China Home Appliances Sector 93

94 Mr. Shi Wan Wen ( 史万文 ), Senior Vice President Mr. Shi Wan Wen, aged 47, joined TCL in 199. He has over 2 years of experience in production, sales and marketing and management of consumer electronics business. Mr. Shi also holds several senior positions in TCL Corporation's subsidiaries, including President of the System Technology Business Unit of TCL Corporation, General Manager of TCL Light Electrical Appliance, the Chairman and the General Manager of TCL Light Electrical Appliances Company, a Director and the General Manager of Guangzhou Joy Network & Technology Company, a Director of Shenzhen Speed Distribution Platform Company, etc. Mr. Shi graduated from the South China University of Technology with a Bachelor degree in Wireless Technology. Dr. Guo Ai Ping ( 郭爱平 ), Senior Vice President Dr. Guo Ai Ping, aged 5, is a Senior Vice President of TCL Corporation. He is also the CEO and Executive Director of TCL Communication (2618.HK). Dr. Guo joined TCL in July 21. He has extensive experience in overall management of multinational company, strategic planning and development, and M&A in the worldwide wireless industry. Prior to joining TCL Corp., Mr. GUO held positions as Manager in SB Global, Project Coordinator in IBM, Senior Business Consultant in Arthur Andersen and CTO in Zhaodaola Internet Company. He graduated from Stanford University with a PhD degree in Management Science and Master s degree in Engineering Economics and System. Dr. Yan Xiao Lin ( 闫晓林 ), CTO Dr. Yan Xiao Lin, aged 47, joined TCL in May 21, and has been Senior Vice President and CTO of TCL Corporation. He graduated from the Institute of Plasma Physics of Chinese Academy of Science with a PhD degree, and a post-doctoral fellow in the Chinese Academy of Science. Dr. Yan has nearly 15 years of experience in the high-tech industry and enjoys a good reputation in his professional field. He was awarded the PRC Quality Entrepreneur for Endogenous Innovation, special allowance from the State Council of the PRC, the Outstanding Expert of Contribution to Chinese Colour TV, the Innovator for Chinese TV Broadcasting Technology, the Labour Model of Guangdong Province and was honoured the Outstanding National Leader of Shenzhen. Mr. Liao Qian ( 廖骞 ), Board Secretary Mr. Liao Qian, aged 34, joined TCL in March 214, and has served as Board Secretary. Prior to this, Mr. Liao worked in Guotai Jun'an Securities Company, responsible for the investment banking business in Hong Kong and China. Mr. Liao holds a master's degree. China Home Appliances Sector 94

95 Asia Pacific / China Consumer Electronics Skyworth Digital Rating OUTPERFORM* Price (22 Oct 14, HK$) 4.17 Target price (HK$) 5.¹ Upside/downside (%) 19.9 Mkt cap (HK$ mn) 11,86 (US$ 1,522) Enterprise value (HK$ mn) 15,826 Number of shares (mn) 2,831.1 Free float (%) week price range ADTO - 6M (US$ mn) 3.9 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance Price (LHS) Research Analysts Eva Wang eva.wang@credit-suisse.com Rebased Rel (RHS) 2 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 22/1/14 On 22/1/14 the spot exchange rate was HK$7.76/US$ Performance Over 1M 3M 12M Absolute (%) Relative (%) (751.HK / 751 HK) INITIATION Gradual recovery with product mix upgrade We initiate coverage with an OUTPERFORM rating and a HK$5. target price, implying 2% potential upside. Skyworth is one of the leading TV brands in China with an extensive sales network in Tier 3/4 cities and rural areas. We like the company for its product mix upgrade, and a recovery in shipments. Product mix upgrade with more contribution from cloud TVs. Sales volume/value of cloud TVs (incl. 4k Cloud TVs) have increased 65%/41% YoY in FY3/14, while the overall sales volume/value of TV recorded YoY declines. We believe sales of cloud TVs should become the key driver of TV business growth for Skyworth. We expect cloud TVs sales volume/value to increase 67%/49% YoY in FY3/15, accounting for 49%/63% of total domestic sales (vs. 31%/46% in FY3/14). Given the company has already achieved 64% YoY growth in cloud TV shipment in 1H FY3/15, we are confident that it can achieve our full-year expectation. With more contribution from cloud TVs, we believe company's ASP should improve YoY. Recovery of shipment uptrend. We expect FY3/15 TV shipment to grow 4% YoY, returning to the uptrend after a setback in FY3/14 due to exsubsidy effect. In 1H FY3/15, the company shipped 5.94 mn TVs, up 6% YoY, which was on track with its annual target of 12 mn units (i.e., +6% YoY). Any upside higher than the target growth for the rest of the year will be a positive surprise. Target price of HK$5 implies 2% potential upside. Skyworth should record a one-off pre-tax gain of HK$1.67 bn in FY3/15 arising from the transfer of redevelopment rights of its Gongming plant. Stripping out the exceptional gain, Skyworth is trading at 7.2x adjusted CY15E P/E and an attractive 4.9% CY15E yield. Our target price of HK$5. (implying 2% potential upside) is based on 8.5x adjusted CY15E P/E, at a discount to key industry players' five-year average forward P/E of 11x, due to subdued growth in the TV sector. Risks to our call include a slowdown in TV demand and fierce competition. Financial and valuation metrics Year 3/14A 3/15E 3/16E 3/17E Revenue (HK$ mn) 39,48. 43, , ,771.1 EBITDA (HK$ mn) 2,365. 2,61.2 3,35.3 3,42.2 EBIT (HK$ mn) 1,958. 2,78.9 2,4.8 2,321.6 Net profit (HK$ mn) 1,254. 2, , ,712.4 EPS (CS adj.) (HK$) Change from previous EPS (%) n.a. Consensus EPS (HK$) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. China Home Appliances Sector 95

96 Apr-2 Apr-3 Apr-4 Apr-5 Apr-6 Apr-7 Apr-8 Apr-9 Apr-1 Apr-11 Apr-12 Apr-13 Apr October 214 Focus charts Figure 153: Net revenue breakdown (FY3/14) Figure 154: Geographic breakdown (FY3/14) LCD modules 2% Digital set-top boxes 11% White appliances 6% Other businesses 6% Export +16.5% YoY Export HK$6,741 mn 17% TV products - Overseas 8% TV products - PRC 67% Domestic HK$32,739 mn 83% Domestic +2.2% YoY Source: Company data Figure 155: Net revenue and net profit forecasts (HK$mn) (%) 6, 4 Source: Company data Figure 156: ASP of TV products (HK$) 3,4 5, 3 3,2 4, 3, 2 1 3, 2, 2,8 1, -1 2,6 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E Net revenue Net revenue YoY chg - RHS Recurring net profit YoY chg - RHS -2 2,4 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E Total TV ASP China TV ASP Source: Company data, Credit Suisse estimates Figure 157: Domestic TV market share (%) 2 Source: Company data, Credit Suisse estimates Figure 158: Forward P/E band chart HK$ x 1x x 4 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q x 1x Source: DisplaySearch Source: Company data, Credit Suisse estimates China Home Appliances Sector 96

97 Key assumptions Figure 159: Revenue breakdown HK$ mn FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E TV products - PRC 21,92 27,14 26,244 28,49 3,812 32,35 TV products - Overseas 1,728 3,18 3,24 3,744 4,27 4,51 Digital set-top boxes 3,27 3,96 4,162 4,333 4,511 4,672 LCD modules ,74 1,289 1,546 White appliances 469 1,691 2,532 3,165 3,545 3,97 Property rental income Other businesses 383 1,397 2,321 2,41 2,521 2,647 TOTAL 28,137 37,824 39,48 43,251 47,12 49,771 YoY% TV products - PRC TV products - Overseas Digital set-top boxes LCD modules White appliances Property rental income Other businesses TOTAL % of total TV products - PRC TV products - Overseas Digital set-top boxes LCD modules White appliances Property rental income Other businesses TOTAL Source: Company data, Credit Suisse estimates Figure 16: Segment gross margin breakdown Gross margin (%) FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E TV products - PRC TV products - Overseas Digital set-top boxes LCD modules White appliances Property rental income Other businesses TOTAL Source: Company data, Credit Suisse estimates China Home Appliances Sector 97

98 Figure 161: Skyworth income statement HK$ mn FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E Revenue 28,137 37,824 39,48 43,251 47,12 49,771 Cost of sales -22,181-3,418-31,851-34,91-37,841-4,332 Gross profit 5,956 7,46 7,629 8,35 9,17 9,439 Other income S&D expenses -3,771-4,554-4,925-5,46-5,829-6,122 Admin expenses -96-1,388-1,645-1,73-1,88-1,991 Operating income 1,76 2,52 1,958 2,79 2,41 2,322 EBITDA 1,943 2,363 2,365 2,61 3,35 3,42 Net finance cost Share of results of associates and JVs Other gains and losses Exceptionals 1,67 Profit before tax 1,576 1,926 1,7 3,645 2,31 2,229 Tax Profit for the year 1,268 1,594 1,433 3,62 1,921 1,85 Minority interest Equity holders of the parent 1,252 1,51 1,254 2,878 1,768 1,72 Basic EPS (HK$) Dilued EPS (HK$) DPS (HK$) Payout ratio (%) Adjusted recurring net profit 1,252 1,51 1,254 1,475 1,768 1,72 Non-recurring items 1,43 Adjusted basic EPS (HK$) Adjusted diluted EPS (HK$) Margins (%) Gross margin Operating margin S&D / sales Admin / sales EBITDA margin PBT margin Net margin Adjusted net margin Effective tax rate YoY (%) Revenue Gross profit EBITDA Operating income PBT Net profit Adjusted net profit Diluted EPS ROE (%) ROA (%) Source: Company data, Credit Suisse estimates China Home Appliances Sector 98

99 Figure 162: Skyworth balance sheet HK$ mn FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E Cash and bank deposits 2,388 2,326 3,23 1,715 3,397 2,297 Pledged bank deposits ,572 1,572 1,572 1,572 Trade and bills receivables 12,63 15,986 15,848 17,73 18,768 19,872 Inventories 3,151 5,19 4,188 5,374 4,994 6,56 Others ,549 1,549 1,549 1,549 Current assets 18,94 24,633 26,18 27,939 3,279 31,347 Property, plant and equipment 2,328 3,68 4,436 5,575 6,43 6,646 Prepaid lease on land use rights Available-for-sale investments Others Non-current assets 3,284 4,43 5,964 7,134 7,991 8,262 Total assets 22,224 29,63 32,144 35,73 38,271 39,69 Trade and bills payables 8,48 11,285 13,335 13,642 15,68 15,568 Bank borrowings 3,568 5,581 5,156 5,156 5,156 5,156 Others ,1 1,1 1,1 1,1 Current liabilities 12,121 17,678 19,51 19,88 21,774 21,734 Bank borrowings Deferred income Others Non-current liabilities 1,435 1,149 1,295 1,395 1,498 1,584 Share capital Reserves 8,2 9,689 1,539 12,875 13,846 14,988 Shareholders' Equity 8,469 9,969 1,822 13,158 14,129 15,271 Non-controlling interests ,2 Total equity and liabilities 22,224 29,63 32,144 35,73 38,271 39,69 Source: Company data, Credit Suisse estimates Figure 163: Skyworth cash flow statement HK$ mn FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E Pre-tax profit 1,576 1,926 1,7 3,688 2,349 2,281 Taxes paid D&A Others Operating cash flow before wc chg 1,74 1,946 1,796 3,563 2,533 2,543 Net change in working capital -86-1,667 3,171-2,66 1,411-2,121 Due from/to associates and others Operating cash flow , , PP&E capex -72-1,77-1,915-1,8-1,5-1, Investments Others Investing cash flow -1, ,524-1,634-1, Dividends paid Exercise of share options Bank borrowings / repayments -72 1, Others Financing cash flow 721 1, Net increase in cash ,38 1,682-1,1 Source: Company data, Credit Suisse estimates China Home Appliances Sector 99

100 Figure 164: Skyworth Digital's corporate structure Source: Company data Figure 165: Skyworth Digital's corporate history Time Event Apr-1988 Skyworth was founded in Hong Kong The company started to manufacture black electronic appliances after granted the colour TV manufacturing licence. Apr-2 Skyworth raised ~HK$1 bn in its IPO at Hong Kong Stock Exchange on 17 April 2. Nov-24 Dec-24 Jan-25 Jan-26 On 3 November 24, company founder and former Chairman Mr. Wong Wang Sang and his brother were detained by ICAC for conspiracy to steal from and defraud the company. Skyworth was suspended from trading on the same day. Mr. Wang Dianfu, an industry practitioner and celebrity, took over the CEO position. Mr. Wang bailed Skyworth out from the turbulence of the scandal. Mr. Wang Dianfu was appointed as the Executive Chairman of the Board. Skyworth's share price plummeted 59% on the first day of resumption of trading. Jul-26 Mr. Wong was found guilty and sentenced for six years. He was subsequently bailed out in July 29. Apr-27 Apr-21 Apr-211 Apr-213 Mr. Zhang Xuebin took over the Executive Chairman position of the company after Mr. Wang's resignation due to age and health reasons. Skyworth's controlling shareholder Target Success Group, wholly-owned by Mr. Wong and his spouse Ms. Lin Weiping, placed 1 mn existing shares of the company (3.957% of its issued share capital) at HK$9. per share. Skyworth Nanjing white appliances manufacturing base was put into operation; the company stepped into the white appliances business. Ms. Lin Weiping was appointed as the Executive Chairperson of the company post Mr. Zhang's resignation. Oct-213 Skyworth announced to cooperate with COFCO Properties in relation to its Shenzhen Gongming production plant for a disposal at the consideration of Rmb1,65 mn. Jul-214 Skyworth's proposal of set-top box business spin-off and backdoor listing by means of China Resources Jinhua ( 華潤錦華, 81.SZ, NR) got approved. Sep-214 LGD Guangzhou 8.5-generation LCD flat panel production line, in which Skyworth has 1% interest, was put into operation. Sep-214 Skyworth's set-top box business was officially backdoor listed at Shenzhen Stock Exchange on 26 September 214 through an asset exchange with China Resources Jinhua. After the deal, Skyworth became the controlling shareholder of China Resources Jinhua with a total equity interest of 58.54%. China Resources Jinhua was proposed to rename as Skyworth Digital Technology ( 創維數字 ) in early October. Source: Company data, Credit Suisse China Home Appliances Sector 1

101 Management profile Executive directors Ms. Lin Wei Ping ( 林卫平 ), Executive Chairperson Ms. Lin Wei Ping, aged 56, is Executive Director, and has been Executive Chairperson since 1 April 213. She is also a member of remuneration committee of the company and Director of certain subsidiaries of the company. Ms. Lin joined the Group in Ms. Lin was deputy manager of purchasing department and administration manager in Hong Kong and subsequently, the head of HR department of the Group. Before joining the Group, Ms. Lin had worked in the Ministry of Information Industry in the PRC as a research engineer. Ms. Lin graduated from South China University of Technology in the PRC with a bachelor degree in electronic engineering. Mr. Yang Dong Wen ( 杨东文 ), CEO Mr. Yang Dongwen, aged 49, is Executive Director and, since 15 February 212, CEO as well as Director of certain subsidiaries of the company and president of the Group. He mainly focuses on the business operations of the Group, assists the Board to formulate strategies for the Group and ensures they are implemented successfully. Mr. Yang joined the Group in May 1998 as financial controller of the finance headquarters in the PRC and from August 2 to August 23, he was general manager of the sales headquarters of the Group in the PRC. Mr. Yang left the Group in August 23 and rejoined the Group in September 25 as president of the China TV business unit of the Group, responsible for managing the research, manufacture and sales of the Group s television products. Mr. Yang graduated from Zhongnan University of Economics and Laws in the PRC with a bachelor's degree in economics and graduated from Nankai University in the PRC with a master's degree in law. Mr. Lu Rongchang ( 陆荣昌 ) Mr. Lu Rongchang, aged 68, joined the Group in May 26, and is currently the Head of R&D Institute of Skyworth Group, and executive vice president and general manager of the R&D Department of the China TV business unit. He is also director of certain subsidiaries of the company. Prior to joining the Group, Mr. Lu worked in companies in the television and communications industry, including Panda Electronics Group. He has over 2 years working experience as general manager and chief engineer as well as has awarded many national and provincial honors. Mr. Lu graduated from the Nanjing Institute of Technologies (now is called Southeast University) and is major in automation control. Dr. Shi Chi ( 施驰 ) Dr. Shi Chi, aged 43, joined the Group in 2 and is President and Founder of Shenzhen Skyworth Digital Technology, a subsidiary of the Group. He is also Director of certain subsidiaries of the company. Dr. Shi graduated from Huazhong University of Science & Technology with a Doctorate degree in Communication and Electronic System. Dr. Shi has been participating in numerous national and provincial projects on technological researches, in charge of designing several high-end digital television products and publishing over 2 articles in various professional and science journals. He is a Member of The 5th Shenzhen Committee of Chinese People s Political Consultative Conference and the Vice President of China Radio and TV Equipment Industry Association. Ms. Chan Wai Kay, Katherine ( 陈蕙姬 ) Ms. Chan Wai Kay, Katherine, aged 55, was Independent Non-executive Director of the company in July 21 and on 9 September 213, was re-designated as Executive Director. Ms. Chan holds a bachelor's degree in business administration from the University of Southern California, USA. Ms. Chan has around 2 years of experience in the financial services industry and has extensive experience in supervising IPO and other fund raising China Home Appliances Sector 11

102 exercises conducted by companies in Asia. At present, Ms. Chan is also Deputy Chairman and Executive Director of China Ground Source Energy Industry Group Ltd (8128.HK, NR). Independent non-executive directors Mr. So Hon Cheung, Stephen ( 苏汉章 ) Mr. So Hon Cheung, Stephen, aged 58, is a practicing accountant and Director of the accounting firm T.M. Ho, So & Leung CPA Limited. Mr. So holds a bachelor's degree in commerce from the University of British Columbia, Canada. He is a fellow member of the Hong Kong Institute of Certified Public Accountants, a member of the Canadian Institute of Chartered Accountants, a member of the Society of Certified Management Accountants of Canada and a fellow member of the Hong Kong Institute of Directors. Mr. Li Weibin ( 李伟斌 ) Mr. Li Weibin, aged 53, is a practicing solicitor in Hong Kong and Founder and Senior Partner of Li & Partners, a firm of solicitors in Hong Kong. He graduated from the China University of Political Science and Law in Beijing, the postgraduate school of the Chinese Academy of Social Sciences in Beijing and the University of Hong Kong with a bachelor's degree in law, a master's degree in law and a bachelor's degree in common law, respectively. Dr. Wei Wei ( 魏炜 ) Dr. Wei Wei, aged 49, has more than 2 years working experience in the field of education and research, mainly in strategic management and business model design. Dr. Wei holds a bachelor's degree of business administration from Huazhong University of Science & Technology, a master degree in business administration from Tsinghua University and a PhD degree in management science from Huazhong University of Science & Technology. Senior management Mr. Liu Tangzhi ( 刘棠枝 ) Mr. Liu Tangzhi, aged 51, joined the Group in He is Vice President of the Group, President of the TV business unit of the Group and also Director of certain subsidiaries of the company. Mr. Liu graduated from the Zhongnan University of Economics and Law in Wuhan with a bachelor degree in economics, and graduated from Macao University of Science and Technology with a master degree in business administration. Mr. Sun Ruikun ( 孙瑞坤 ) Mr. Sun Ruikun, aged 5, joined the Group in September 213. He is Vice President of the Group. Mr. Sun graduated from the Nankai University of Economics with a bachelor's degree in history, and graduated from the CEIBS with a master's degree in executive business administration. Mr. Sun has more than 3 years' management experience in the field of government authorities, large government-owned businesses and investments. Mr. Lam Shing Choi, Eric ( 林成财 ), Company Secretary & Financial Controller Mr. Lam Shing Choi, Eric, aged 42, is the Company Secretary and the Financial Controller of the company. Mr. Lam joined the Group in March 1998 as finance manager. In January 21, he was transferred to Skyworth Multimedia as financial controller. From 26 to 27, he worked as financial controller of Skyworth Overseas Development, and then served as financial controller of Skyworth TV Holdings from 27 to 211. He was financial controller of the TV business unit of the Group in December 211 and the LCD business unit of the Group since December 212. Mr. Lam graduated from Monash University in Australia with a bachelor's degree of business in accounting and a bachelor degree of computing in information systems. China Home Appliances Sector 12

103 Mr. Wang Dehui ( 王德辉 ) Mr. Wang Dehui, aged 58, joined the Group in 27. He is General Manager of headquarters of manufacture in Shenzhen Chuangwei-RGB Electronics and Director of certain subsidiaries of the company. Mr. Wang graduated from Nanchang University with a bachelor's degree in mechanical engineering, and has MBA from Renmin University of China in 23. He has been engaged in research of moulds, injection moulding, spraying and the machinery manufacturing industry for over 28 years. Mr. Sun Weizhong ( 孙伟中 ) Mr. Sun Weizhong, aged 38, is Vice President of the TV business unit of the Group and General Manager of overseas sales, as well as Director of certain subsidiaries of the company. Mr. Sun joined the Group in 1999 after he graduated from the Northwestern Polytechnic University with a bachelor's degree. In these years, he has worked as sales representative, manager of sales office, general manager of regional office, director of brand department, marketing director and sales director of China sales of the Group. Mr. Peng Jin ( 彭劲 ) Mr. Peng Jin, aged 46, is Vice President of the TV business unit of the Group and General Manager of China sales. Mr. Peng joined the Group in Mr. Peng graduated from the Huazhong University of Science and Technology. In these years, he has worked as manager of service centre, manager of regional office and general manager of regional office. Mr. Peng has over ten years' working experience in brand promotion, marketing and sales operations. Mr. Wu Qinan ( 吴启楠 ) Mr. Wu Qinan, aged 39, joined the Group in 21, and is General Manager of Skyworth Electrical Appliance (Shenzhen). Mr. Wu graduated from University of Electronic Science and Technology of China with a bachelor's degree in electronic science and technology in 1995 and graduated from China Europe International Business School with a master's degree in business administration in 29. Mr. Wu works in the field of consumer electronics for 18 years, and has over 15 years working experience in manufacturing management, product planning, marketing and business operations. Dr. Li Xiaofang ( 李小放 ) Dr. Li Xiaofang, aged 5, joined the Group in 2, and is General Manager of Skyworth LCD Modules (Shenzhen). Dr. Li graduated from Shaanxi University of Technology with a bachelor's degree in mechanical engineering in 1984 and graduated from Xi an Jiaotong University with a master's degree in management engineering in He graduated from Tianjin University with PhD degree, and was also an associate professor in economics and management. Mr. Guo Limin ( 郭利民 ) Mr. Guo Limin, aged 56, joined the Group in July 1999, and is the Head of the legal affairs department of the company, Chairman of the supervisory committee of Shenzhen Skyworth Digital Technology and Director of certain subsidiaries of the company. Prior to that, he was assistant to the Chairman and head of the administration department of the company. Mr. Guo graduated from the Southwest University of Political Science & Law in Chongqing with a bachelor's degree in law. Ms. Shao Meifang ( 邵美芳 ) Ms. Shao Meifang, aged 58, joined the Group in 22. She is general manager of Skyworth Group construction business unit, and director of certain subsidiaries of the company. Ms. Shao graduated from Suzhou Vocational University with a major in economic management. Before joining the Group, Ms. Shao had over 2 years of working experience in star-rated hotels and investing development companies. China Home Appliances Sector 13

104 Asia Pacific / China Consumer Electronics Rating OUTPERFORM* Price (22 Oct 14, Rmb) 8.87 Target price (Rmb) 1.7¹ Upside/downside (%) 2.6 Mkt cap (Rmb mn) 7,973 (US$ 1,33) Enterprise value (Rmb mn) 7,195 Number of shares (mn) Free float (%) week price range ADTO - 6M (US$ mn) 8.9 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance 14 9 Price (LHS) Research Analysts Eva Wang eva.wang@credit-suisse.com Rebased Rel (RHS) 4 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 22/1/14 On 22/1/14 the spot exchange rate was Rmb6.12/US$ Performance Over 1M 3M 12M Absolute (%) Relative (%) Hisense Kelon Electrical Holdings Company Limited (921.SZ / 921 CH) INITIATION Recovery on track with high growth potential We initiate coverage with an OUTPERFORM rating and a Rmb1.7 target price, implying 21% potential upside. It is one of the largest refrigerator and AC manufacturers in China. Its major products, refrigerators (under the brands of "Ronshen" +"Hisense") and ACs ("Hisense"+"Kelon") ranked No 2 (market share: 14.%) and No 4 (8.5%), respectively, in China, according to China Market Monitor in 2Q14 in terms of retail sales value. We like the company's recovery story with greater growth potential compared to its peers. Recovery on track with the air conditioner business being the main driver. The company has been gaining AC market share since 212 from smaller players due to relatively high quality and comparatively reasonable price. Its market share had reached 8.5% in 2Q14 (vs 7.4% in 2Q13). In addition, we noticed GP margin for the AC segment keeps rising from 11.7% in 211 to 24.% in 1H14. We estimate that AC will gradually become the main revenue/earnings contributor, accounting for 47%/54% of revenue/gp in 215E from 38%/39% in 213 on the back of (1) volume increase and (2) margin expansion due to product mix improvement. Higher-than-industry growth potential is the main catalyst. We expect Hisense Kelon 's revenue to grow at 11-13% and recurring earnings to grow at 22%-31% in E, which is higher than our forecast 3-1% market size three-year CAGR for refrigerators and ACs, although there might be a setback in earnings in 214E, as the company is ramping up its capacity for the high-end refrigerator production base in Qingdao which should commence production in 4Q14. Valuation and investment risks. Hisense Kelon is trading at 8.7x 215E P/E. Our target price of Rmb1.7 (implying 21% potential upside) is based on 1.5x 215E P/E, at a discount to key industry players' five-year average forward P/E of 11x, due to a lack of track record since its recovery. Downside risks include a slowdown in home appliances demand and an unexpected surge in raw materials cost. Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 24, , , ,533.4 EBITDA (Rmb mn) 1,95.3 1, , ,4.9 EBIT (Rmb mn) , ,55.3 Net profit (Rmb mn) 1,239. 1,36.4 1, ,73.1 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. China Home Appliances Sector 14

105 Focus charts Figure 166: Gross revenue breakdown (213) Figure 167: Geographic breakdown (213) Other products 12% Non-core business 9% Refrigerators 38% Export +12.8% YoY Export Rmb6,563 mn 3% Domestic Rmb15,624 mn 7% Domestic +35.4% YoY Air conditioners 41% Source: Company data Figure 168: Domestic market share (%) # (213) Refrigeratros Source: Company data #4 8.9 (1H14) Air conditioners Source: Company data Figure 169: Net revenue and net profit forecasts (Rmbmn) (%) 4, 25 35, 2 3, 15 25, 1 2, 5 15, 1, 5, E 215E 216E Net revenue Net revenue YoY chg - RHS Net profit YoY chg - RHS Recurring net profit YoY chg - RHS Source: Company data, Credit Suisse estimates Figure 17: ASP of refrigerators and air conditioners (Rmb) 3, 2,5 2, 1,5 1, Figure 171: Forward P/E band chart Rmb x 13x 1x 7x x E 215E 216E Refrigeratros Air conditioners. Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates China Home Appliances Sector 15

106 Key assumptions Figure 172: Hisense Kelon gross revenue breakdown Rmb mn E 215E 216E Refrigerators 8,246 8,461 1,16 1,463 11,1 11,833 Air-conditioners 6,517 6,665 9,234 13,61 15,373 17,756 Other products 1,986 2,227 2,847 3,132 3,445 3,79 Non-core business 1,74 1,65 2,173 2,499 2,874 3,35 Total gross revenue 18,489 18,959 24,36 29,155 32,792 36,683 YoY % chg Refrigerators Air-conditioners Other products Non-core business Total gross revenue % of total Refrigerators Air-conditioners Other products Non-core business Total gross revenue Source: Company data, Credit Suisse estimates Figure 173: Gross profit breakdown Gross margin on gross revenue (%) E 215E 216E Refrigerators Air-conditioners Other products Non-core business Gross margin on gross revenue GP incl. business tax (Rmb mn) Refrigerators 1,791 1,993 2,387 2,274 2,413 2,76 Air-conditioners 1,53 1,348 2,62 3,329 4,132 4,834 Other products Non-core business Gross profit incl. business tax 3,286 3,925 5,32 6,573 7,621 8,736 YoY % chg Refrigerators Air-conditioners Other products Non-core business Gross profit incl. business tax % of total Refrigerators Air-conditioners Other products Non-core business Gross profit incl. business tax Source: Company data, Credit Suisse estimates China Home Appliances Sector 16

107 Figure 174: Hisense Kelon income statement Rmb mn E 215E 216E Net revenue 18,426 18,854 24,26 29,36 32,658 36,533 Cost of sales -15,23-15,34-19,4-22,582-25,171-27,948 Gross profit 3,223 3,82 5,221 6,454 7,487 8,586 S&D expenses -2,636-2,732-3,678-4,617-5,193-5,89 Admin expenses ,96-1,226 Operating profit ,198 1,55 EBITDA ,95 1,275 1,654 2,41 Net finance income / (cost) FX gains / asset impairment Share of profit of associates and JVs Investment income / fair value change Net non-operating income Profit before taxation ,323 1,234 1,681 2,11 Taxation Profit for the period ,269 1,62 1,429 1,772 Minority interests Profit to equity shareholders ,239 1,36 1,395 1,73 Basic EPS (Rmb) Diluted EPS (Rmb) DPS (Rmb) Dividend payout ratio (%) Reported recurring net profit ,78 1,15 1,327 1,662 Non-recurring items Recurring basic EPS (Rmb) Recurring diluted EPS (Rmb) Margins (%) Gross margin Operating margin S&D / Sales Admin / Sales EBITDA margin PBT margin Net margin Recurring net margin Effective tax rate YoY (%) Net revenue Gross profit EBITDA Operating profit , PBT Net profit Recurring net profit Diluted EPS ROE (%) ROA (%) Source: Company data, Credit Suisse estimates China Home Appliances Sector 17

108 Figure 175: Hisense Kelon balance sheet Rmb mn E 215E 216E Cash & cash equivalents ,378 2,392 3,748 Trade and bills receivables 1,697 3,15 3,86 4,786 5,92 6,58 Inventories 1,547 1,738 2,496 2,453 3,64 3,62 Prepayments & others ,165 1,38 1,461 Total current assets 4,435 5,93 7,747 9,782 11,856 14,329 PP&E 1,947 1,91 2,369 2,745 2,84 2,857 Construction in progress Intangible assets Long-term equity investments ,245 1,552 1,91 Others Total non-current assets 3,2 3,27 4,217 4,915 5,386 5,84 Total assets 7,635 9,2 11,965 14,697 17,242 2,134 Trade and bills payable 2,667 3,768 4,872 5,398 6,49 6,662 Advances from customers ,86 1,221 1,366 Bank borrowings 1, Tax and other payable 1,68 1,533 1,583 2,72 2,331 2,67 Others Total current liabilities 6,162 6,958 8,364 9,966 11,11 12,45 Accrued liability Others Total non-current liabilities Share capital 1,354 1,354 1,354 1,358 1,363 1,368 Reserves ,395 2,431 3,826 5,556 Total shareholders' equity 85 1,512 2,749 3,79 5,189 6,924 Minority interests Total liabilities and equity 7,635 9,2 11,965 14,697 17,242 2,134 Source: Company data, Credit Suisse estimates Figure 176: Hisense Kelon cash flow statement Cash flow statement E 215E 216E Pre-tax profit ,323 1,234 1,681 2,11 Tax (paid)/received D&A Investment in associate Others Operating cash flow before w/c chg ,26 1,439 1,566 1,884 WC change Others Operating cash flow 38 1, ,364 1,617 1,882 Purchase of assets Others Investing cash flow Capital injection Net borrowings Dividend paid Others Financing cash flow Net change in cash ,14 1,356 Source: Company data, Credit Suisse estimates China Home Appliances Sector 18

109 Figure 177: Hisense Kelon's corporate structure Source: Company data Figure 178: Hisense Kelon's corporate history Time Event 1984 Founded as Guangdong Shunde Peral River Refrigerator Factory. Dec 1992 Jul 1996 Jul 1999 Oct 21, Mar/Apr 22 Oct 24 Jun 25 Dec 26 Mar 27 Jun 27 Jul 27 Aug 29 Mar-Jun 21 Apr 213 May 214 Restructured into a joint stock limited company, renamed as "Guangdong Kelon Electrical Holdings Co Ltd. The company's H share (459,589,88 shares) got listed. The company's A share (11,, shares) got listed. Guangdong Greencool/Shunde Economic Consultancy/Shunde Dongheng Development/Shunde Xinhong acquired 2.64%/6.92%/.71%/5.76% shares from Guangdong Kelon (Rongsheng) Group Co Ltd, which ceased to be the largest shareholder of the company. Guangdong Greencool acquired 5.79% shares from Shunde Xinhong, its interest increased to 26.43%, and became the largest shareholder. H share of the company got suspended due to the lawsuit related to its former chairman Mr Gu Chujun. The case was finalised in Jan 29, and the trading of its H shares got resumed. Qingdao Hisense Air-Conditioning acquired 26.43% of the total share capital from Guangdong Greencool, and became the largest shareholder. The "Reform of Non-tradeable Shares Scheme was approved by Ministry of Commerce PRC. After completion of the scheme, the company's non-freely transferable domestic legal person shares were converted to freely transferable A shares, and Qingdao Hisense Air-Conditioning's share is 23.63%. Renamed as "Hisense Kelon Electrical Holdings Co Ltd" A shares subject to "Special Treatment (ST)" as its NPAT (ex. one-off items) turned negative in 26, with short name for its A shares also changed to "ST Kelon". The company undertook a major asset reorganisation and entered into conditional sale and purchase agreement regarding acquisition of the white goods assets and business of Hisense Air-Conditioning through issuance of shares. The acquisition was approved by CSRC, and the company issued 362,48,187 A shares to Hisense Air-Conditioning for acquisition. The number of shares of the company reached 1,354,54,75 as of 3 June 21. The company's A shares was refrained from "Special Treatment (ST)" due to improved profitability, with its A shares' short name reinstated from "ST Kelon" to "Hisense Kelon", and the limit on daily trading price change of restored from 5% to 1%. The conditions for exercising the first batch of Kelon's first share option incentive scheme were satisfied. 4,44,81 new A shares were registered and listed, among which 1,669,47 shares were restricted in 6 months. The total number of shares reached 1,358,495,56 as of 3 June 214. Source: Company data, Credit Suisse China Home Appliances Sector 19

110 Management profile Executive directors Mr. Tang Ye Guo ( 汤业国 ), Chairman Mr. Tang Ye Guo, aged 51, has been Chairman of the board of directors of the company since June 26. He has also acted as Vice President of Hisense Company Limited ( Hisense Group ) and Chairman of the board of directors of Qingdao Hisense Air- Conditioning Company Limited ( Hisense Air-Conditioning ) since August 23. Since April 21, Mr Tang has also served as Director of Hisense Group. From 23 to 21, Mr Tang served successively as an assistant to the president in Hisense Group, the general manager of Hisense Air-Conditioning, a director of Hisense Electric Co., Ltd. ( Hisense Electric ), and the president of the company. Ms. Yu Shu Min ( 于淑珉 ) Ms. Yu Shu Min, aged 62, has been Director of the company since June 26. She has been the chairwoman of the board of directors of Hisense Electric since December 1999, and the vice chairwoman of the board of directors and the president of Hisense Group since July 21. Mr. Lin Lan ( 林澜 ) Mr. Lin Lan, aged 56, has been Director of the company since June 26, and acted as vice president of the company from September 22 to June 26. He has also served as vice president and director of Hisense Group since July 26 and December 29, respectively; and has been director of Hisense Electric since May 27. He worked as manager of the power system software development department of Siemens AMEC Limited in the UK, senior project manager and senior engineer of GE Power Systems Co. Mr. Xiao Jian Lin ( 肖建林 ), President Mr. Xiao Jian Lin, aged 46, has served as Director of the company since January 211, and president of the company since March 214. He has also worked as director of Hisense Group, Hisense Electric, and Hisense Air-Conditioning since January 2, June 28 and April 29. From 27 to 214, he served in different positions in Hisense Group as head of audit department, vice-president, head of finance and operation management centre, to name a few. Non-executive independent directors Mr. Xu Xiang Yi ( 徐向艺 ) Mr. Xu Xiang Yi, aged 58, has been Independent Non-executive Director of the company since June 212. Mr Xu has served as an independent director for various corporates since 23. Mr Xu holds a Ph. D. in Law from Shandong University. He is currently the head of corporate governance research centre of Shandong University, and a professor and a Ph.D supervisor in Business Management Department. Mr. Wang Ai Guo ( 王爱国 ) Mr. Wang Ai Guo, aged 49, has been Independent Non-executive Director of the company since January 211. He has also acted as independent director for various companies listed in China/HK. Mr Wang is a postdoctoral fellow in accountancy in Tianjin University of Finance & Economics, and is currently the dean, a professor and a Ph.D supervisor of Shandong University of Finance and Economics, and also a council member of various professional bodies in China. China Home Appliances Sector 11

111 Mr. Wang Xin Yu ( 王新宇 ) Mr. Wang Xinyu, aged 43, has acted as Independent Non-executive Director of the company since September 211. Mr Wang graduated from the University of International Business and Economics with a bachelor's degree in international finance and obtained a MBA from the University of Chicago Booth School of Business. He has acted as managing director of JP Capital Investment Limited since September 21. Supervisors Mr. Liu Zhen Shun ( 刘振顺 ), Chairman of Board of Supervisors Mr. Liu Zhen Shun, aged 44, has served as Supervisor of the company since January 214. He has been Head of the legal affairs department since July 22, and Deputy Secretary of the discipline inspection committee of Hisense Group since Mar 25. He was the deputy head of the legal affairs department from March 25 to June 212. Ms. Gao Yu Ling ( 高玉玲 ) Ms. Gao Yu Ling, aged 33, has served as Supervisor of the company since January 214. She has also been Deputy Head of the finance and operation management department of Hisense Group since March 213. She was deputy director of the finance centre of Hisense Electric from April 212 to February 213. She holds a master s degree in accountancy. Mr. Zhang Jian Jun ( 张建军 ) Mr. Zhang Jian Jun, aged 4, has been Supervisor of the company since June 212, and the head of the legal affairs department since Sep 21. He also served in the PRC marketing company of the company from Mar 27. He holds a bachelor's degree in law. Senior Management Mr. Jia Shao Qian ( 贾少谦 ), Vice President Mr. Jia Shao Qian, aged 41, has served as Vice President of the company since Jan 27. He served as a legal adviser in the corporate legal department, a supervisor of public relations in the president office, deputy manager of the president office and manager of the president office of Hisense Group. He also served as chairman of the supervisory committee of Hisense Electric from June 26 to March 211. Mr. Tian Ye ( 田野 ) Mr. Tian Ye, aged 39, has been Vice President of the company since May 213. He has served as assistant to the general manager of Hisense Electric from August 26 to March 21, and the deputy general manager of Hisense Electric from March 21 to April 213. Mr Tian also held managerial role in procurement, financial planning, and general manager office in of Hisense Group and Hisense Electric. Mr. Huang Xiao Jian ( 黄晓剑 ) Mr. Huang Xiao Jian, aged 55, has been Vice President of the company since Mar 214. He acted as vice general manager of Qingdao Hisense International Marketing Holdings Co., Ltd. from February 27 to February 214. He also held managerial roles in engineering, design, and sales management department of the company. He holds a master's degree in mechanics in South China University of Technology. Ms. Li Jun ( 李军 ) Ms. Li Jun, aged 39, has been finance manager and chief accountant of the company since August 212. She also acted as a supervisor of the company from June 212 to August 212, and was the deputy director of the finance and operation department of Hisense Group from January 29 to August 212. Ms Li is a certified public accountant. China Home Appliances Sector 111

112 Mr. Xia Feng ( 夏峰 ) Mr. Xia Feng, aged 37, has been secretary to the board of directors and the head of securities department of the company since August 21. He was previously head of the capital operating department of Hisense Group, deputy manager of the marketing department of Hisense Air-Conditioning, and deputy manager, representative of securities affairs, manager of securities department and secretary to the board of directors of Hisense Electric. Mr Xia holds a master degree in management. Company Secretary Ms. Wong Tak Fong ( 黄德芳 ) Ms. Wong Tak Fong, aged 46, has acted as company secretary of the company since June 212 (as a joint company secretary from April 211 to June 212). She has acted as managing director of General Bright Consultants Ltd. since November 1994, and chief financial controller of STAR TEAM ASIA LTD since December 21. Ms Wong holds a master degree in Business Administration from the University of Bradford, and is an associate member of the Hong Kong Institute of Chartered Secretaries and the Institute of Chartered Secretaries and Administrators in the United Kingdom, a certified tax adviser and an associate member of the Taxation Institute of Hong Kong. China Home Appliances Sector 112

113 Appendix II: Sector fundamentals Air conditioners: Domestic outgrows export, central AC has more potential Refrigerators: Product upgrade offset slow growth Washing machines: New design and function attract customers Television: Export and upgrade drive demand Water heaters: Increasingly a household must Kitchenware: Ride on changing lifestyle Other small appliances: Air/water purifiers grow fast China Home Appliances Sector 113

114 Air conditioners: Domestic outgrows export, central AC has more potential The air conditioner market in China can be classified into the residential AC market and the commercial AC market. The residential AC market is relatively mature in China with a total market size of 111 mn units (China IOL) or Rmb2 bn (CS estimates) in 213. It is currently a duopoly market dominated by Gree and Midea, followed by Haier, which is growing fast. On the other hand, the commercial AC market had a smaller size of Rmb59 bn as of 213, but grew faster (+16.7% YoY) in 7M14 (January to July). We believe the residential market will be mainly driven by the increasing penetration rate, while the commercial market will be motivated by the infrastructure construction and wider application and increasing penetration of commercial AC in these places. Residential AC: Gree and Midea dominate The residential AC market recorded 111 mn units of sales in 213 (+6.4% YoY) according to China IOL, which focuses on the electric appliance industry chain research in China. If we assume the average selling price of AC is Rmb1,8 per unit, this implies a total market size of Rmb2 bn for the residential AC market. Domestic sales (55% of total in 213) have grown faster than export sales (45% of total in 213) in recent years. In 8M14 (January to August 214), the residential AC market maintained its stable volume growth of 5.4% YoY, with domestic sales growing robustly at 17.3% YoY, while export fell 7.6% YoY, based on China IOL's data. In terms of brand market share (Figure 18 to Figure 182), Gree is #1 and Midea #2 these top two brands accounted for a 59% market share or a 67% domestic market share. Haier is currently #3, but has been growing at a faster speed YTD, with total sales volume +14.8% YoY in 8M14, vs. +1.3% YoY for Gree and +9.4% YoY for Midea. We believe the residential AC market is likely to achieve stable growth in the next few years, because its penetration rate still has room to improve, especially in the rural areas (with penetration low at only 25% in 212 according to NBS). Even in the urban areas, we believe the current penetration rate (127% in 212) does not imply a saturated market, because there could be one residential AC per room or multiple ones per household. Figure 179: Residential AC sales volume (mn units) (%) 12 5 Figure 18: Residential AC total market share by volume (213) Others 18% Changhong 2% TCL 4% Hisense Kelon 5% Gree 35% 2 Chigo 5% M14 Domestic Export Total YoY chg - RHS -1 Haier 7% Midea 24% Source: China IOL Source: China IOL China Home Appliances Sector 114

115 Figure 181: Residential AC domestic market share by volume (213) Figure 182: Residential AC export market share by volume (213) Hisense Kelon 5% Chigo 4% Changhong TCL 3% 2% Others 1% Gree 44% Others 29% Gree 23% Haier 9% Midea 23% Changhong 1% TCL 6% Hisense Kelon 4% Chigo 7% Haier 5% Midea 25% Source: China IOL Source: China IOL Figure 183 shows the market share by quarter from China Market Monitor, which mainly reflects the retail sales value breakdown by brands based on a survey of over 7, retail stores in 9+ cities and counties in China. We think China Market Monitor is more tilted towards retail-end data, especially with the inclusion of international brands in top tier cities. Figure 183: Market share of top air conditioner brands in China (in terms of retail sales value monitored by CMM) % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Gree Midea Haier Hisense Mitsubishi Ryoden AUX Chigo Daikin Kelon Changhong TCL Whirlpool Mitsubishi Heavy Industries Panasonic Electrolux Other brands Total Source: China Market Monitor Commercial AC: Fast growing, foreign brands dominate The commercial AC market had a total market size of Rmb59 bn as of 213, according to China IOL. Commercial AC is defined by its application in commercial areas or large areas, such as office buildings, subways, etc. By international practice, it usually refers to the air conditioners with motor running over 3 horsepower (HP). It is in direct contrast with residential AC, which is usually used in a single room of a house, with a motor below 3HP. The commercial AC market has grown faster YTD, with total sales value up 16.7% YoY in 7M14 (January to July 214), according to China IOL. Domestic sales (up 18.5% YoY in 7M14, as shown in Figure 185) dominate the commercial AC market (9% of total sales China Home Appliances Sector 115

116 value), much higher than the ratio in the residential AC market (domestic sales at ~56% of total sales volume only). The VRF (variable refrigerant flow, 多联机 ) model is still the most popular central AC. It accounted for 45% of total commercial AC sales in 7M14 and grew at 24% YoY, faster than industry average, according to China IOL. Figure 184: Commercial AC sales value (Rmb bn) % 2% 15% Figure 185: Commercial AC market breakdown Export +3.5% YoY Export Rmb3.9 bn 1% 8 1% 4 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 5% % Domestic Rmb33.4 bn 9% Domestic +18.5% YoY Commerical AC sales value Total YoY chg - RHS Source: China IOL Source: China IOL, as of 7M14 (January August) The term "central AC" is widely used in the discussion of commercial AC in many research institutes and statistical analysis (such as China IOL). Central AC is a structural system in which a centralised controlling unit cools and dehumidifies air before circulating it throughout a building. It is in direct contrast with individual set AC. Due to functional requirement, central AC is mainly used in a large area and has high requirement of motor HP (e.g. Gree's minimum central air conditioner power is 5 HP). Therefore in this report, we define commercial air conditioner exchangeable with central air conditioner, which includes the central air conditioner used in large-sized houses. In terms of market share (Figure 186), the international players are still the main players of the market, with Daikin taking the lead after it acquired McQuay. The top three Chinese brands accounted for 34.5% of the total commercial AC market. We believe the growth of the commercial AC market will mainly be driven by the infrastructure construction in China, including malls, office buildings, and urban subways, as well as extensive application and increasing penetration of commercial AC in these places. Domestic brands may outgrow international brands in the next few years due to a low base and after-sales service, as long as they're comparable to international brands in terms of quality and technology. China Home Appliances Sector 116

117 Figure 186: Market share of major central AC brands by value (1H14) Others 21.9% York 6.9% Carrier 4.7% Trane 2.9% McQuay 5.2% 4 big western brands 19.7% Haier 4.% Daikin 14.4% Chinese brands 34.5% Midea 14.4% Toshiba 2.6% Japanese brands 23.9% Hisense Hitachi 6.9% Gree 16.1% Source: Central AC Business Information by Changzhou Aircon Internet Ad Co. Figure 187: Market share of major commercial air conditioner products by value (1H14) (%) VRF 多联机 Unitary 单元机 Screw Chiller 螺杆机 Terminals 末端 Centrifugal Chiller 离心机 Modular Chiller 模块机 Geothermal Chiller 水地源 Lithium Bromide 溴化锂 Others 其他 Source: Central AC Business Information by Changzhou Aircon Internet Ad Co. China Home Appliances Sector 117

118 Refrigerators: Product upgrade offsets slow growth The refrigerator market had a sales volume of 77 mn units in 213 (+1.3% YoY), according to China IOL. It continued to be flat in 8M14, up.9% YoY only. Domestic sales (73% of total in 213) have been weaker than export sales (27% of total in 213) in recent years. In 8M14 (January to August 214), domestic sales dropped 3.7% YoY, while exports were grew robust by 14.1% YoY, based on China IOL's data. In terms of the brand market share, Haier is #1 with a focus on the domestic market (92% of sales in China), followed by Midea (68% of sales in China) and Kelon (69% of sales in China), in terms of sales volume, according to China IOL. Figure 188: Refrigerator total sales volume (mn units) (%) Figure 189: Refrigerator total market share by volume (213) Haier 22% Others 5% Midea 9% M14 Domestic Export Total YoY chg - RHS -1 Konka 1% TCL 1% Meiling 6% Kelon 11% Source: China IOL Figure 19: Refrigerator domestic market share by volume (213) Haier 28% Source: China IOL Figure 191: Refrigerator export market share by volume (213) Haier 8% Midea 1% Others 44% Kelon 11% Konka TCL 1% 2% Meiling 6% Kelon 11% Midea 8% Others 64% Meiling 6% TCL 1% Source: China IOL Source: China IOL We believe the volume growth of the refrigerator market is likely to be flat or in low single digits in the next few years, because penetration of refrigerator is pretty high in China with 98.5% in urban and 67.3% in rural in 213, according to NBS. We haven't seen any drastic change in the Chinese lifestyle to drive refrigerator penetration to over 1% yet there is no demand for specialty refrigerators yet, e.g. for storage of wines. China Home Appliances Sector 118

119 However, we believe the product upgrade will continue to drive the ASP growth and margins of refrigerator manufacturers. For example, according to China Market Monitor, the more complicated multi-door refrigerators (including three-door and above, and sideby-side combination refrigerators) has been growing fast over the past few years. They accounted for 51% of sales volume but 73% of retail sales value in 1H14, with selling prices at Rmb3, or higher. On the other hand, double-door refrigerators (47% of total sales volume) have a low average selling price of less than Rmb1,7. We expect leading brands in this market, such as Haier and Midea, to continue to benefit from product upgrade demand from customers with income growth and urbanisation. Figure 192: Market share of top refrigerator brands in China (in terms of retail sales value monitored by CMM) % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Haier Siemens Ronshen Meiling Midea Samsung Hisense Xinfei Panasonic LG Electrolux Bosch TCL Homa Whirlpool Other brands Total Source: China Market Monitor Figure 193: Market share of top freezer brands in China (in terms of retail sales value monitored by CMM) % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Haier Xinfei Xingxing Aucma Meiling Midea Ronshen Baixue Banshen Bosch Other brands Total Source: China Market Monitor China Home Appliances Sector 119

120 Washing machines: New design and functions attract customers The washing machines market was flat in 213 with a total sales volume of 56 mn units (+.5% YoY) according to China IOL. It continued to be flat in 8M14, up only 1.5% YoY. Domestic sales (67% of total in 213) were weaker than export sales (33% of total in 213) in recent years. In 8M14 (January to August 214), domestic sales were flat, up only.2%, while exports grew slightly by 4.2% YoY, based on China IOL's data. In terms of the brand market share, Haier is #1 and Midea (under Little Swan brand) #2, accounting for 41% of total sales volume or 52% of domestic market sales, according to China IOL. Figure 194: Washing machine total sales volume (mn units) (%) M14 Domestic Export Total YoY chg - RHS Source: China IOL Figure 196: Washing machine total market share by volume (213) China IOL Figure 195: Washing machine total market share by volume (1H14) CMM Samsung 2.6% TCL 3.% LG 3.7% Electrolux 3.9% Midea 4.7% Siemens 6.6% Others 14.% Panasonic 7.% Sanyo 14.% Source: China Market Monitor, Haier Electronics Haier 26.7% Little Swan 13.8% Figure 197: Washing machine domestic market share by volume (213) China IOL Haier 25% Others 4% Haier 33% Others 53% Midea 16% Sanyo 6% Sanyo 8% Midea 19% Source: China IOL Source: China IOL We believe lifestyle changes would be the main driver of washing machine growth in the future, although penetration (98.% in urban and 67.2% in rural in 212, according to NBS) is already high based on the current mainstream usage of washing machines. China Home Appliances Sector 12

121 The sector's growth may come from demand for clothes dryer, either separate (which leads to more volume growth and higher penetration rate), or combined with washer (which results in upgrade demand). The future growth may also come from increasing demand for new product design and functions, such as Haier's self-cleaning technology or Midea (Little Swan)'s detergent accurate delivery technology, which became very popular among customers upon launch. Haier self-cleaning washing machines adopt innovative technologies the wall of both the interior and exterior drums can be cleaned with smartparticles during the cleansing and rinsing procedures, which solves the problem of inner-drum dirt accumulation and avoid secondary pollution in washing machines. Little Swan i-intelligent Precise Delivery Washing Machine consists of 15 models. The series can sense precisely the washing weight, and determine accurately the detergent delivery according to the washing mode and cleaning grade, which can achieve the optimal washing effect of Precise Intelligent Delivery, Clean, without Residue". Figure 198: Haier self-cleaning washing machine Figure 199: Little Swan i-intelligent accurate dispenser washing machine Source: Company data Source: Company data Figure 2: Market share of top washing machine brands in China (in terms of retail sales value monitored by CMM) % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Haier Siemens Little Swan Sanyo Panasonic Samsung LG Midea Whirlpool Bosch Electrolux TCL Hisense Other brands Total Source: China Market Monitor China Home Appliances Sector 121

122 Television: Exports and upgrade drive demand LCD TVs account for more than 9% of total sales of colour TVs in China and worldwide. The LCD TV market recorded 19 mn units in 213 (+2.6% YoY) according to China IOL. Over the past five years, growth of LCD TV sales volume has been decelerating, as shown in Figure 22. YTD we note that domestic demand has been stagnant, with sales volume declining 5% YoY in 8M14. On the other hand, overseas sales have outgrown domestic sales, with sales volume up 37% YoY, bringing the overall up 16% YoY to 75 mn units in 8M14. Overseas sales accounted for 53% of total sales in 213, and increased to 6% in 8M14. Figure 21: LCD TV production in China Figure 22: LCD TV sales in domestic/overseas market mn unit LCD TV production YoY 12 YoY % 14% mn unit 12. Domestic sales Overseas sales Overall YoY YoY % Domestic YoY Overseas YoY 14% % 1% 8% 6% 4% 2% % 1% 8% 6% 4% 2% % M14 % M14-2% Source: China IOL, NBS, Credit Suisse Source: China IOL, NBS, Display Search, Credit Suisse In terms of brand market share by sales volume, Hisense, TCL and Skyworth remains the top three in the China market, accounting for 51% of total sales volume in 1Q14 in China, and they are also among the top ten in the global market, according to Display Search. Figure 23: LCD TV PRC market share by sales volume (1Q14) Figure 24: LCD TV global market share by sales volume (1Q14) AOC/TP Vision, 2.% Sony, 2.7% Sharp, 3.6% Others, 9.4% Hisense, 18.7% Others 25.6% Samsung 22.5% Samsung, 5.3% Haier, 6.1% Changhong, 7.4% Konka, 12.6% TCL, 16.% Skyworth, 16.2% AOC/TP Vision 3.7% Panasonic 3.8% Skyworth 4.2% Sharp 4.2% Toshiba TCL 4.3% 5.4% Sony 5.7% Hisense 5.6% LGE 15.% Source: Display Search, Credit Suisse Source: Display Search, Credit Suisse Our analysis of market share by sales value (1Q13 vs 1Q14) further suggests that Hisense is gaining market share by not only volume increase, but also ASP upgrade; TCL is losing in both its ASP and volume share. China Home Appliances Sector 122

123 Figure 25: Market share by sales value and sales volume in China and global market China 1Q14 vs Market share move Market share move ASP Market share move Market share move ASP 1Q13 in sales value in sales volume change in sales value in sales volume change Hisense 3.1% 2.4% 1% 1.2%.6% 5% Skyworth -.3%.2% 4% -.3% -.5% 4% TCL -5.4% -4.3% -3% -1.8% -1.8% -8% Source: Display Search, Credit Suisse estimates TV penetration in China is relatively high (over 1% in both rural/urban areas) compared with other home appliances like air conditioners. For the Chinese manufacturers, we believe growth in the overall market size should be limited, driven mainly by export growth and upgrade demand in China, like smart TVs, high resolution (4k) and big screen TVs. In general, Display Search projected a general declining trend for both China and global TV market size. Global Figure 26: LCD TV sales volume growth forecast 7.% 6.% 5.% 4.% 3.% 2.% 1.% Figure 27: LCD TV market value growth forecast 2.%.% -2.% -4.% -6.% -8.%.% 214E 215E 216E 217E 218E -1.% 214E 215E 216E 217E 218E China Overseas Global China Overseas Global Source: Display Search, Credit Suisse estimates Source: Display Search, Credit Suisse estimates In light of a possibly shrinking market size, we believe there are opportunities and challenges for TV manufacturers. The major opportunities lie in market consolidation and vertical integration. Good examples are: (1) Hisense, as a market consolidator wining market share by quality and innovative products, extensive sales network; and alliance with other traditional TV players to combat threats from new entrants; and (2) TCL, despite a shrinking market share in TVs, entering into TV/tablet/mobile panel industry to enjoy synergies in cost control and more importantly, capture the upgrade market growth by supplying high-end panels to third parties. Figure 28: Market share of top LCD TV brands in China (in terms of retail sales value monitored by CMM) % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Hisense Skyworth Samsung TCL Changhong Sharp Konka Sony Haier LG Sanyo Pioneer Other brands Total Source: China Market Monitor China Home Appliances Sector 123

124 The major risks and challenges for TV-makers are how to improve products innovation, quality and differentiability rather than sliding into price wars against existing players and new entrants. TV-makers have already noticed the trend of possibly decreasing market size yet increasing market players. They have invested heavily to launch smart TVs that not only contain popular internet content, but also function as an interface towards a smart home system. Besides, to combat new entrants' aggressive marketing and low price efforts, ten TV-makers Hisense, Skyworth, Changhong, Samsung, Panasonic, Lenovo, TCL, Toshiba, AOC, Meiling have announced to form a smart home appliance alliance, called Mensa China, which is set to establish the technical standards for smart home appliances. Take Hisense for an example Tmall's latest sales statistics showed that in 9M14, Hisense TV topped both sales volume and sales value in Tmall TV category, with sales value up over 1% YoY, mainly attributable by its sales of large-sized smart TV. Hisense's VIDAA2 Smart TV series has been the most popular smart TV in Tmall. Shown in Figure 29 to Figure 212 are some cool characteristics of Hisense VIDAA2 Smart TV. Figure 29: Overall appearance all-in-one with all features internally installed Figure 21: Slim side even slimmer than iphone 5, similar to iphone 6/+ Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 211: Comprehensive application system Figure 212: Mobile TV interaction between users Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates China Home Appliances Sector 124

125 Water heaters: Increasingly a household must The water heater market reached a total size of 49.5 mn units in 213, with growth in gas and electric water heaters offsetting the decline in the solar water heaters (Figure 213), according to China IOL. The export market accounted for 19% of total (Figure 214). In terms of the brand market share (Figure 215), Haier is #1 with a 17.2% market share in 1H14, according to China Market Monitor, followed by A.O.Smith (14.7%) and Midea (14.4%). We believe the market competition of water heaters has intensified over recent years due to relatively stable product function and design, although penetration should still have room to improve (91% in urban in 212 according to NBS, but no data point available for rural area). The top water heater manufacturers will mainly attract customers by focusing on product quality and reliability, while the challenges include a lack of product differentiation and promotional activities by other brands. Figure 213: Water heater market share by product (213) Figure 214: Water heater domestic sales vs. export (213) Solar -17.6% YoY Solar 12.9 mn units 26% Gas 16.3 mn units 33% Gas +7.1% YoY Export +3.2% YoY Export 9.5 mn units 19% Electric +1.2% YoY Electric 2.3 mn units 41% Domestic 4. mn units 81% Domestic -.2% YoY Source: China IOL Figure 215:Water heater market share by volume (1H14) Noritz 2.6% Rinnai 3.1% Vatti 3.2% Ariston 3.2% Whirlpool 5.% Others 18.9% Macro 8.5% Vanward 9.2% Haier 17.2% Source: China Market Monitor, Haier Electronics Midea 14.4% A.O.Smith 14.7% Source: China IOL Figure 216: Electric water heater sales volume growth (mn units) Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 Domestic Export YoY chg - RHS Source: China IOL 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % China Home Appliances Sector 125

126 Figure 217: Gas water heater sales volume growth Figure 218: Solar water heater sales volume growth (mn units) (mn units) 5 15% 6 % 4 1% 5-5% 3 5% 4-1% 3-15% 2 % 2-2% 1-5% 1-25% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13-1% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Jul-14-3% Domestic Export YoY chg - RHS Domestic Export YoY chg - RHS Source: China IOL Source: China IOL Below is the quarterly market share of electric and gas water heaters by market value, according to China Market Monitor. Figure 219: Market share of top electric water heater brands in China (in terms of retail sales value monitored by CMM) % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 AO Smith Haier Midea Ariston Whirlpool Macro Siemens Vanward Sacon Electrolux 1.5 n.a Other brands Total Source: China Market Monitor Figure 22: Market share of top gas water heater brands in China (in terms of retail sales value monitored by CMM) % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 AO Smith Macro Vanward Rinnai Noritz Haier Vatti Midea Qianfeng Ariston Sakura Fotile Whirlpool Other brands Total Source: China Market Monitor China Home Appliances Sector 126

127 Kitchenware: Ride on changing lifestyle The kitchenware market has been growing fast in China in recent years, and comprises mainly ventilators, rice cookers, gas stove, induction cooker, etc. The market has been growing rapidly in China over the past few years due to low penetration, lifestyle changes and new product functions. We estimate that the total sales value of the kitchenware in China will likely grow at 2-3% p.a. in the next few years, with teen growth in volume plus ASP increases from smarter appliances and product upgrade. The major domestic players are likely to benefit from the high growth of kitchenware market, including Robam, Fotile, Midea, Supor, etc. They're catching up with international brands in terms of product quality and design, therefore gaining market share rapidly. Key risks for the kitchenware players include product quality and performance consistency, downside risks from high margins (much higher profitability compared to other home appliance manufacturing). Figure 221: Ventilator sales volume growth Figure 222: Rice cooker sales volume growth (mn units) 3 7% (mn units) 25 6% % 5% 4% 3% % 1 5 2% 1% % 1 5 2% H14 Sales volume YoY chg - RHS -1% H14 Sales volume YoY chg - RHS % Source: NBS Source: NBS Ventilator sales in China recorded an 18.7% CAGR for to 25 mn units in 213, according to NBS. It continues to grow stably with 1H14 sales volume up 17.3% YoY as shown in Figure 221. This growth data is consistent with 15.% YoY retail sales growth recorded by China Market Monitor in 1H14, implying a slight ASP decline. Rice cooker sales in China achieved a 19.7% CAGR for to 28 mn units in 213 (Figure 222), according to NBS. In 1H14, the NBS data indicated strong volume growth of rice cookers at +41.% YoY, which, however, was much higher than the retail sales growth rate of 8% reported by China Market Monitor. We believe the discrepancy in growth rates partly lies in different statistic methods, ASP and probably exports, or other undisclosed issues. These data shall be used with caution. Gas stove production in China recorded a 12.6% CAGR for to 3 mn units in 213, according to NBS. Its growth has still been strong YTD, with 8M14 production volume up 22.9% YoY as shown in Figure 223. China Home Appliances Sector 127

128 Figure 223: Gas stove production volume growth (mn units) M14 4% 3% 2% 1% % -1% -2% Figure 224: Low penetration rate of certain kitchenware Microwave oven Dishwasher Food processor Production volume YoY chg - RHS China US UK Japan Source: NBS Source: Euromonitor, Midea Group prospectus, as of 211 Figure 225: Midea IH intelligent rice cooker Figure 226: Robam kitchenware set Source: Company data Source: Company data Figure 227: Market share of top ventilator brands in China (in terms of retail sales value monitored by CMM) % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Robam Fotile Vatti Midea Siemens Sacon Haier Vanward Macro Sakura Other brands Total Source: China Market Monitor China Home Appliances Sector 128

129 Figure 228: Market share of top rice cooker brands in China (in terms of retail sales value monitored by CMM) % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Midea Supor Joyoung Panasonic Povos Galanz Philips Mazuba Triangle Tiger Toshiba Cuckoo Haier Gree Other brands Total Source: China Market Monitor Figure 229: Market share of top gas stove brands in China (in terms of retail sales value monitored by CMM) % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Robam Fotile Vatti Siemens Midea Sacon Vanward Haier Macro Sakura Other brands Total Source: China Market Monitor Figure 23: Market share of top induction cooker brands in China (in terms of retail sales value monitored by CMM) % 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Midea Supor Joyoung Galanz Povos Mazuba Haier Gree ASD Rileosip Other brands Total Source: China Market Monitor China Home Appliances Sector 129

130 Other small appliances: Air/water purifiers grow fast The fastest growing small appliances in recent years are air purifiers and water purifiers, which reflect increasing awareness of environmental issues and rising demand for health and safety related products. The serious air pollution in many areas in China has led to rapid growth of the air purifier market. Sales volume of air purifiers reached 6.8 mn units in 7M14, up 33% YoY. Particularly, domestic sales volume went up 81% YoY to 2.2 mn units. Figure 231: Air purifier sales volume growth (mn units) % 7% 6% 5% 4% Figure 232: Air purifier domestic sales vs. export (7M14) Domestic 2.2 mn units 33% 7M14 domestic +81.1% YoY 1 3% 2% Export 4.6 mn units 67% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 1% % 7M14 export +17.2% YoY Domestic Export YoY chg - RHS Source: China IOL Source: China IOL Figure 233: Market share of top air purifier brands in China (in terms of retail sales value monitored by CMM) % 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Philips Panasonic Sharp Blueair Yadu Air-O-Swiss Austin Lexy Whirlpool n.a. n.a. n.a. n.a. n.a IQAir Electrolux Darkin Samsung n.a Broad Midea Other brands Total Source: China Market Monitor Water purifiers also have recorded high growth in recent two years, with 213/7M14 sales volume reaching 8.9 mn/6.8 mn units, up 55%/3% YoY, respectively. China Home Appliances Sector 13

131 Figure 234: Water purifier sales volume growth (mn units) % 6% 5% 4% 3% Figure 235: Water purifier domestic sales vs. exports (7M14) 7M14 export -14.8% YoY Export.7 mn units 11% 1 2% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 1% % Domestic 5.8 mn units 89% 7M14 domestic +38.1% YoY Domestic Export YoY chg - RHS Source: China IOL Source: China IOL Figure 236: Market share of top water purifier brands in China (in terms of retail sales value monitored by CMM) % 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Midea Qinyuan Angel A.O. Smith Litree M Ecowater Haier QLife Everpure Other brands Total Source: China Market Monitor Figure 237: Gree water purifier Figure 238: Philips air purifier Source: Company data Source: Company data China Home Appliances Sector 131