qingdao haier co., ltd

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

18 January 2016

Asia Pacific/China

Equity Research

Consumer Electronics

Qingdao Haier Co., Ltd.

(600690.SS / 600690 CH) ACQUISITION

Acquiring GE Appliance

■ Qingdao Haier announced its plan to acquire GE Appliance for US$5.4

bn; GE expects to complete the deal in mid-2016. The deal has already

been approved by the board of GE and Qingdao Haier, but is still subject to

QD Haier's shareholder approval and regulatory approvals. The deal will be

financed 40% by internal resources and 60% by bank borrowing in USD.

The likelihood of approvals by government is high, in our view, with few anti-

trust risks because the Haier brand has less than 1-2% market share in US.

■ Access to the US market for Qingdao Haier's globalisation is one of the

key benefits. GE Appliance generates ~90% of revenue in US and has the no.

two market share, with good technology, modern production, strong logistics

and installation services. We expect the transaction to create synergy between

the two. QD Haier may continue to use GE brand for 40 years.

■ However, the transaction is not cheap, with execution risks. The deal

was reached at 8.2x rolling EV/EBITDA including special tax gains according

to QD Haier management, or 10.0x rolling EV/EBITDA based on CS

estimates, higher than QD Haier's 5.7x EV/EBITDA. We believe execution

risks could be high given that QD Haier has little operational experience in

the US market and there could be potential cultural conflicts between the

management teams.

■ Positive profit impact, but details unknown; stock trading suspended.

We calculate that the annualized EBT impact of the deal after additional

interest expenses on debt financing would be ~13% assuming 7% interest

rate. The final earnings impact shall be lower than 13% due to higher US tax

rate. We have not factored it into our model pending on detailed updates.

Share price performance

40

60

80

100

120

0

5

10

15

20

Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the

Shanghai Shenzhen CSI300 index which closed at 3118.73 on

10/01/16

On 10/01/16 the spot exchange rate was Rmb6.58/US$1

Performance over 1M 3M 12M Absolute (%) — — -6.6 — Relative (%) 17.0 11.8 7.6 —

Financial and valuation metrics

Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 88,375.7 79,702.9 91,232.0 95,511.5 EBITDA (Rmb mn) 7,211.2 6,117.2 6,786.3 7,345.3 EBIT (Rmb mn) 6,457.9 5,315.6 5,900.3 6,370.0 Net profit (Rmb mn) 4,991.6 4,157.1 4,643.9 5,099.9 EPS (CS adj.) (Rmb) 0.87 0.68 0.76 0.83 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.74 0.90 1.03 EPS growth (%) 13.4 -22.0 11.7 9.8 P/E (x) 11.4 14.6 13.1 11.9 Dividend yield (%) 5.0 2.1 2.3 2.5 EV/EBITDA (x) 4.8 5.7 4.1 3.1 P/B (x) 2.8 2.5 2.1 1.9 ROE (%) 27.5 17.9 17.6 16.9 Net debt/equity (%) Net cash Net cash Net cash Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating NEUTRAL* [V] Price (16 Oct 15, Rmb) 9.92 Target price (Rmb) 9.80¹ Upside/downside (%) -1.2 Mkt cap (Rmb mn) 60,742 (US$ 9,226) Enterprise value (Rmb mn) 34,604 Number of shares (mn) 6,123.15 Free float (%) 45.1 52-week price range 16.10 - 8.61 ADTO - 6M (US$ mn) 104.0

*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).

Research Analysts

Eva Wang

852 2101 7365

[email protected]

18 January 2016


(600690.SS / 600690 CH) 2

Focus charts and table Figure 1: Gross revenue breakdown (1H15) Figure 2: QD Haier's China market share (2015)

Air conditioner22%

Refrigerators31%

Kitchenware (including water

heater)8%

Washing machines

16%

Equipment Product

3%

ICS19%

Non-core business

1%

25.824.1

11.5

17.6

0

5

10

15

20

25

30

Washing machines Refrigeratros Air conditioners Water heaters

(%)

#1#1

#3

#1

Source: Company data Note: by volume. Source: Company data, CMM

Figure 3: GE Appliance market share in US Figure 4: QD Haier's forward PE band chart

12%

17%

9%

24%

15%

22%

0%

5%

10%

15%

20%

25%

30%

Airconditioner

Refrigerator Washingmachine

Cookingstove

Dish washer Microwave

6.0x

9.0x

12.0x

15.0x

18.0x

0.0

3.0

6.0

9.0

12.0

15.0

18.0Ja

n-09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

(Rmb)

Source: Euromonitor, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 5: GE Appliance's revenue and EBIT vs. QD Haier

1Q15 2Q15 3Q15 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 2014 2015E 2016E

GE Appliance (US$ mn)

Sales 1,357 1,656 1,660 1,723 1,428 1,747 1,751 1,817 5,908 6,396 6,743

YoY change 8% 7% 10% 8% 5% 5% 5% 5% 2% 8% 5%

EBIT 200 320 337

EBIT margin 3.4% 5.0% 5.0%

P/EBIT 27.0x 16.9x 16.0x

QD Haier (Rmb mn)

Sales 88,775 80,103 91,644

Operating profit 6,458 5,316 5,900

Operating margin 7.3% 6.6% 6.4%

P/EBIT 5.5x 6.7x 6.0x

GE Appliance as % of Qingdao Haier

Sales 41% 52% 50%

EBIT 19% 40% 39%

Annualized EBT addition after new debt interest* 13%

Note: *Assuming 60% debt financing of GE Appliance deal with 7% interest rate. Source: Company data, Credit Suisse estimates

18 January 2016


(600690.SS / 600690 CH) 3

Acquiring GE Appliance Qingdao Haier announced to acquire GE's appliance businesses (GE Appliance) for

US$5.4bn, implying 16.9x 2015E P/EBIT or 16.0x 2016E P/EBIT. The transaction has

been approved by the board of GE and Qingdao Haier, but is still subject to QD Haier's

shareholder approval and regulatory approvals. GE expect to close the deal in mid-2016.

Positives and potential upside for Qingdao Haier include:

1) Access to US appliance market as part of its globalization plan, where Haier has

less than 1-2% market share in branded markets (OEM export does not count);

GE Appliance has strong presence in US with no. 2 market share (after Whirlpool),

supported by its good logistics and installation services.

2) Synergy in overall technology improvement, new product development, modern

production and automation, etc.

3) Use of GE brand for 40 years, including 20 years with no extra expenses and

renewable for 10 years plus another 10 years; further renewal beyond 40 years is

subject to GE's approval; (the period of using the brand is much longer than that

when Haier Group acquired Sanyo in South East Asia).

4) High chance of being approved by both China and US governments, in our view,

especially as the deal should not be affected by anti-trust requirements.

5) No dilution for equity shareholders due to the acquisition, as 40% of consideration

(~Rmb14bn) will be financed by internal cash, while the rest (~Rmb21bn) will be

financed with US$-denominated loans.

6) Net positive earnings contribution (additional operating profit > interest expenses

on new loans) in the first year post transaction as expected by management.

Negatives and risks include:

1) The deal is probably not cheap in US market. Although management commented

that it implies 8.2x rolling EV/EBITDA including special tax gains (which was not

explained in detail in analyst conference call), cheaper than 8.5-10x of

comparable deals in the market, our US research team calculated it at 10.0x,

higher than they expected for GE (link to the note).

2) Low PE to acquire high PE may arouse many investors' concern on dilution.

Qingdao Haier is trading at 5.7x rolling EV/EBITDA, or 6.7x 2015E P/EBIT, which

is much cheaper than the transaction's implied 10.0x EV/EBITDA and 16.9x

2015E P/EBIT for GE Appliance.

3) Execution risks for QD Haier to set up the new board, retain talent, learn how to

operate in the US market, deal with retirement and other issues, etc. It may take

many years before they can fully control and manage GE Appliance.

4) Potential cultural conflict: we believe the management styles of Qingdao Haier

and GE Appliance could be very different under different cultures, which could

present risks in future.

5) US economic risks which may result in slowdown in the demand for the home

appliances products locally.

Conclusion: too early to applause for the deal

CS estimates of GE Appliance's summary financials is shown in Figure 6. We have not

factored this into our QD Haier model yet, but the relative comparison is illustrated. If we

assume 60% debt financing, 7% interest rate and 6.78 USD/RMB exchange rate, the

annualize EBT contribution of GE Appliance is ~13% of QD Haier EBIT before acquisition.

We believe the final PAT impact shall be smaller given higher US tax rate.

Total consideration

US$5.4bn, to complete in

mid-2016

Pros: access to US market,

business synergy, no equity

dilution

Cons: not cheap, execution

risks, cultural conflict

PAT impact may be limited

to below 13% on annualized

basis

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=806914450&serialid=CwZ0J16vDxsOjwX%2bFj9OBsSavgTn3jOLx6lKZlXS2T4%3d

18 January 2016


(600690.SS / 600690 CH) 4

Figure 6: GE Appliance's revenue and EBIT vs. QD Haier

1Q15 2Q15 3Q15 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 2014 2015E 2016E

GE Appliance (US$ mn)

Sales 1,357 1,656 1,660 1,723 1,428 1,747 1,751 1,817 5,908 6,396 6,743

YoY change 8% 7% 10% 8% 5% 5% 5% 5% 2% 8% 5%

Segment profit 75 129 129 146 86 140 140 154 296 480 521

Segment margin 5.5% 7.8% 7.8% 8.5% 6.0% 8.0% 8.0% 8.5% 5.0% 7.5% 7.7%

EBIT 200 320 337

EBIT margin 3.4% 5.0% 5.0%

P/EBIT 27.0x 16.9x 16.0x

QD Haier (Rmb mn)

Sales 88,775 80,103 91,644

Operating profit 6,458 5,316 5,900

Operating margin 7.3% 6.6% 6.4%

P/EBIT 5.5x 6.7x 6.0x

GE Appliance as % of Qingdao Haier

Sales 41% 52% 50%

EBIT 19% 40% 39%

Debt Financing

Bank borrowing (US$ mn) 3,240

Interest rate assumption 7%

Interest expenses annualized (US$ mn) 226.8

EBT increase annualized (US$ mn) 110.3

% of QD Haier EBIT annualized 13%

Note: *Assuming 60% debt financing of GE Appliance deal with 7% interest rate. Source: Company data, Credit Suisse estimates

We have not factored in the financial impact of the transaction due to lack of details. We

wait for more details regarding the acquisition target which the company promised to

disclose as soon as available.

Meanwhile, we expect the stock may be further suspended (EGM result note), pending on

further notice from Qingdao Haier.

Figure 7: Qingdao Haier's cash position and potential outflows

Rmb mn QD Haier Consolidated Including Haier Elec

Jun-2015 Jun-2015

Total cash 26,621 9,613

Debts 2,215 1,213

Net cash 24,406 8,400

Pending outflows

Haier Singapore 4,874 Announced on 26 May 2015

Mitsubishi Heavy-Haier 516 Announced on 7 Jan 2016

Haier-Carrier 325 Announced on 7 Jan 2016

GE deal (40% internal) 14,180 Announced on 15 Jan 2016

Subtotal 19,896

Source: Company data

Stock still suspended

https://plus.credit-suisse.com/r/aZ9DWt

18 January 2016


(600690.SS / 600690 CH) 5

Appendix I: Management conf call Part one – Management discussion summary

Management believes that acquiring GE Appliance has very high strategic value for QD

Haier. They believe GE's strength in branding, R&D and distribution network in the US

could help improve Haier's competitiveness in American market. The management has

faith in GE's growth and profitability in the coming future, and expects to see synergy

effects in various aspects, including products development, R&D resources and supply

chain, etc.

Qingdao Haier nailed the deal by bidding, with a final bidding price of US$5.4bn. The

company believes that GE chose QD Haier not only for the price, but also in recognition of

QD Haier's professional management and potential synergy post acquisition. Management

believes the valuation at 8.2x EBITDA multiple (excluding non-recurring items) is

reasonable. As for the payment, a total of US$5.4bn will be paid by cash, 40% from

internal cash, and 60% financed by new bank borrowing. Post completion of the deal,

consolidated debt to asset ratio will not exceed 70%. The new borrowing will be

denominated in US$, so no impacts from Rmb fluctuation, according to the management.

Part two - Q&A

Q1. Will you consider to issue new shares to payback the new bank borrowing?

A：The financing arrangement for this transaction has already been settled. We do not

have new equity issue plan in the short term.

Q2. We know that Haier kept Sanyo and Fisher &Paykel's original management team

after acquisition. Do you have similar arrangement for GE Appliance? What kind of

synergy do you expect for this acquisition? What's the impact on EPS of QD Haier?

A： We will keep GE Appliance's independence in business operation. We will set up an

independent Board to provide guidance and supervision: like what we have down like

Sanyo and Fisher &Paykel's. Based on our previous experiences, we believe this could

better utilize their own experience and boost motivation and innovation.

GE Appliance had very stable sales growth since 2013, with EBIT for 2013/2014/9M15

registering US$ 176mn, 200mn and 223mn respectively. We expect both revenue and

profit to continue to grow in the future. Though there will be interest expenses for the new

borrowing (60% of total consideration,~US$3.24bn), but we believe, net net, it will have a

positive contribution to QD Haier's EPS after financing cost. We believe the transaction will

increase our total net earnings given potential synergy in increasing both revenue and cost

efficiency.

Q3. How long is QD Haier entitled to use the GE brand? What will happen afterwards?

Do you need to pay any loyalty fee or other expenses during that period?

A： We are entitled to use GE brand for 40 years, with first 20 years without extra expenses,

and an alternative to re-negotiate for 10 years plus another 10 years. further renewal beyond

40 years is subject to GE's approval. We may need to pay extra fees depending on product

category change if there's any. Relevant details will be released later.

Q4. What synergy do you expect to see from both revenue side and cost side?

A：We expect synergies to come from 1) revenue increase after we connect China and

US market; 2) product resources and product team cooperation; 3) system improvement in

supply chain, procurement, cost control and quality improvement.

Q5. When do you expect to see the positive impact on EPS?

A：We expect to see a net positive earnings contribution from the first year post completion

of the deal. We will disclose more financial details after the next Board meeting.

18 January 2016


(600690.SS / 600690 CH) 6

Q6. What's GE Appliance's strength in the US?

A：GE is the second largest home appliance brand in the US. It has a wide range of

products in kitchenware (especially strong in cooking utensils), followed by refrigerators

and washing machines. GE has strong capability in R&D, logistics and distribution network

in the US. There is potential synergy between GE leading new product development

capability and Haier's five R&D centres globally.

Q7. Is there any co-operation between Haier Group and GE Appliance at the current

stage? If so, what's the impact on QD Haier?

A：Haier Group has been in strategic co-operation with GE for a long time. We expect QD

Haier to benefit from the corporation in many aspects, including smart appliances,

industrial internet, as well as products R&D and distribution channels.

Q8. Do you have a 3-5 year growth target for GE Appliance?

A：First, we are very positive on GE Appliance's growth in the next 3-5 years. GE

Appliance's revenue from the U.S. accounted for ~90% of total. We believe the home

appliance sector will see a stable growth in the next 3-5 years, backed by the data we

collected from various sources. We may release relevant data and guidance later.

Q9. Currently most of GE Appliance's business are in the U.S. market. Do you have

any plan to expand GE's business into China? Or any other regions globally?

A：Yes we plan to arrange an independent and separate R&D team and marketing team

to operate GE brand in China. Currently we don't have any other plan to change the GE

operation in other markets but we will consider once there's a good chance/timing.

Q10. Since QD Haier also has business in the U.S., will you consider consolidating

the two business?

A：We'll keep GE's independence and keep the two brands running separately in the U.S..

We believe Haier Brand will benefit from GE's brand power as well.

Q11. What's the financing method for this deal?

A：We will pay 40% by cash, and the other 60% by financing, i.e. US$ bank borrowing in

overseas market. Borrowing term would be ~3-5 years.

Q12. Since GE is a traditional U.S. company, is there any pension plan liability (养老

金负债)? How do you treat the pension liability for the deal?

A：Yes GE is responsible for the pension plan liability (养老金负债) before the completion

of the deal. Post completion of the deal, Qingdao Haier is obligated to the future pension

plan liability.

Q13. Is there any breakup fee if the deal didn't pass through? What's the possibility

of failing in your view?

A：Currently there are mainly 3 risks: 1) The antitrust authorities in the U.S., however we

believe the risk is quite small (or almost zero); 2) approval from China authorities, which is

progressing well; and 3) QD Haier's board meeting, which we believe is the biggest

uncertainty We hope get shareholder's support in completing the transaction.

Q14. What's GE Appliance's net profit?

A：We believe the transaction is mainly about sales of assets. We do not have details

regarding taxation information yet, but we may release it later if we get the data. From

what we have on hand, we can see that GE Appliance has very good cash flow, and the

cash flow generated by GE Appliance itself will be more than enough to pay the interest

expenses caused by financing for the deal. We have GE Appliance's EBIT data in our

announcement. If we assume I (interest expenses) to be zero, the net profit after

deducting tax should be positive. The target of the deal does not have any interest-bearing

18 January 2016


(600690.SS / 600690 CH) 7

debts. We will provide more information after we receive the complete balance sheet of

GE Appliance later.

Q15. We see GE Appliance's revenue and EBIT grew significantly in 9M15. What's

the reason behind the strong growth? Is there any one-off factor or non-recurring

item?

A：This has been one of the key questions we've been asking GE during the negotiation

of the transaction. Based on public information, data provided by GE and our due diligence,

we can see that the growth in 9M15 was not driven by any one-off factor or non-recurring

item. GE invested ~US$ 1bn since 2012 into appliance business in products platform

upgrade, rebranding and market expansion and factory modernization, which helped

improve GE's brand image, product efficiency, and competitiveness. We think these are

the key drivers for the strong growth in 2015. And they will help drive their profit growth in

the future as well.

Q16. Do you plan to keep GE Appliance's capacity in America? What's your plan for

its OEM business? Will you transfer all OEM business to QD Haier or keep it the way

it was?

A：GE has been investing a lot into upgrading capacity in the past few years. We are

going to keep the capacity and continue to develop its competitiveness. We will keep its

OEM business unchanged, continue the corporation with existing partners.

Q17. Do we have an comparable EV/EBITDA multiple for the transaction for reference?

A：The target of the transaction is mainly related to its assets, excluding cash, interest-

bearing debts and preferred share, etc. It included the liabilities to suppliers in the

business operation. According to US laws, there will be a positive special tax gains (特定

税务收益) for a very long time in the future. If we exclude the potential tax gains (特定税务

收益), EV/EBITDA for the deal is 8.2x. The EV/EBITDA range for comparable companies

is 8.9-10x and 8.5-10x for comparable transactions. Therefore we believe the valuation is

quite reasonable.

Q18. Where are GE Appliance's factories located in the U.S.?

A ： GE Appliance's factories are mainly located in Louisville, Kentucky, including

refrigerator, washing machine and dishwasher factories; besides, it has a refrigerator

factory in Alabama, and a kitchenware factory in Georgia.

Q19. What's the number of staff in GE Appliance? Is Qingdao Haier required to

maintain employees? If so, how many?

A：GE Appliance has a total number of ~12,000 employees Regarding employee

retention, we have a preliminary talent retention plan and mid-to-long-term incentive

scheme, which is still under discussion. We want to keep GE's excellent management

team, technology experts and manufacturing workers.

Q20. Re the Independent Board you mentioned earlier, how many seats does Haier

have?

A：We haven’t established the independent Board yet, therefore too early to comment.

Some background information:

1) Re GE Appliance, this is not the first time for them to plan to sell. Back in

September 2014, GE announced its intention to sell its appliance business to

Electrolux for US$3.3bn, but it failed due to anti-trust concerns in November 2015

in a civil lawsuit filed by the US Department Justice 'to prevent a duopoly', which

surprised the market. GE was determined to divest the business due to a raw

materials price hike as well as pressure from the property market over the

previous few years.

18 January 2016


(600690.SS / 600690 CH) 8

2) Re Qingdao Haier, this is also not the first time that it has tried to buy a US home

appliance business. Early in 2005, Qingdao Haier bid for Maytag, which was the

third largest appliance player in US, for US$1.28bn, but failed. Maytag was

acquired by Whirlpool. Qingdao Haier has been looking for opportunities to get

into US market for many years.

18 January 2016


(600690.SS / 600690 CH) 9

Appendix II: Valuation Comps Figure 8: Valuation comparison

Mkt Price EPS growth P/E P/B Yield NC/EQT ROE

Cap (Loc (%) (x) (x) (%) (%) (%)

Name Ticker (US$ mn) curr) CY15E CY16E CY17E CY15E CY16E CY17E CY15E CY15E FY0 CY15E

Qingdao Haier 600690.SS 9,226 9.92 -22.0 11.7 9.8 14.6 13.1 11.9 2.5 2.1 88.7 16.9

Midea Group 000333.SZ 18,394 28.39 16.8 9.7 15.4 9.8 8.9 7.7 2.5 4.1 -1.4 25.2

Gree 000651.SZ 17,177 18.80 -6.0 -1.6 4.6 8.5 8.6 8.3 2.3 7.1 101.5 27.5

Haier Electronics 1169.HK 4,595 12.82 8.2 0.1 6.4 11.1 11.1 10.5 2.1 0.9 75.2 18.6

Hisense Electric 600060.SS 2,913 14.66 -0.5 8.5 7.7 13.8 12.7 11.8 1.6 2.2 26.7 11.8

TCL Corporation 000100.SZ 6,672 3.60 -20.9 18.1 21.9 13.1 11.1 9.1 1.7 2.2 -46.8 12.4

Skyworth Digital 0751.HK 1,591 4.25 14.7 4.5 4.4 6.5 6.3 6.0 0.8 4.5 4.8 15.3

Hisense Kelon - A 000921.SZ 1,128 6.86 -38.0 29.2 6.9 22.3 17.3 16.2 2.4 0.0 15.6 10.8

Hisense Kelon - H 0921.HK 1,128 3.24 -38.0 29.2 6.9 8.9 6.9 6.4 1.0 0.0 15.6 10.8

Weighted average -2.6 7.6 10.7 10.9 10.1 9.1 2.2 3.9 42.8 21.4

Refrigerators

Qingdao Haier 600690.SS 9,226 9.92 -22.0 11.7 9.8 14.6 13.1 11.9 2.5 2.1 88.7 16.9

Hisense Kelon - A 000921.SZ 1,128 6.86 -38.0 29.2 6.9 22.3 17.3 16.2 2.4 0.0 15.6 10.8

Midea Group 000333.SZ 18,394 28.39 16.8 9.7 15.4 9.8 8.9 7.7 2.5 4.1 -1.4 25.2

Aucma 600336.SS 601 5.80 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -50.1 n.a.

Homa 002668.SZ 1,564 62.28 28.4 21.4 41.0 39.4 32.5 23.0 5.0 0.4 -22.9 13.7

Meiling 000521.SZ 517 5.66 -15.0 17.1 20.6 17.3 14.7 12.2 1.2 1.6 19.6 7.2

Weighted average 3.2 11.8 14.8 13.3 11.8 10.1 2.6 3.1 24.0 21.3

Washing machines


Hefei Sanyo 600983.SS 1,278 10.98 -1.8 24.2 11.4 21.9 17.7 15.8 2.1 1.1 28.0 8.5

Little Swan 000418.SZ 1,555 23.19 30.2 22.0 19.0 16.2 13.3 11.2 2.9 1.9 36.7 18.1


Air conditioners

Gree 000651.SZ 17,177 18.80 -6.0 -1.6 4.6 8.5 8.6 8.3 2.3 7.1 101.5 27.5

Midea Group 000333.SZ 18,394 28.39 16.8 9.7 15.4 9.8 8.9 7.7 2.5 4.1 -1.4 25.2

Qingdao Haier 600690.SS 9,226 9.92 -22.0 11.7 9.8 14.6 13.1 11.9 2.5 2.1 88.7 16.9

DunAnEnvironment 002011.SZ 2,128 16.72 -20.7 n.m. 42.3 n.m. n.m. n.m. 3.4 0.6 -113.2 2.7

Chunlan 600854.SS 474 6.01 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -8.2 n.a.

Chigo 0449.HK 108 0.10 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -218.4 n.a.

Daikin Industries 6367.T 19,504 7,824 16.0 11.8 9.4 17.5 15.6 14.3 2.1 1.4 -35.8 12.6

Ingersoll-Rand IR.N 13,507 51.74 11.7 7.1 10.5 13.9 13.0 11.7 2.4 2.2 -41.7 0.2


Water heaters


Jiangsu Sunrain 603366.SS 973 8.01 74.1 12.8 n.a. 17.0 15.1 n.a. 1.6 1.7 31.5 n.a.

Vanward 002543.SZ 955 14.29 20.3 15.1 10.7 19.6 17.0 15.4 2.1 1.6 12.3 10.9

Vatti 002035.SZ 751 13.77 -18.3 36.6 39.5 21.6 15.8 11.3 3.1 1.5 23.7 14.6

Macro 000533.SZ 796 7.59 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -5.9 n.a.

A O Smith AOS.N 5,590 63.51 27.6 13.6 13.3 20.5 18.0 15.9 3.9 1.2 23.0 19.4

Rinnai 5947.T 4,803 10,810 6.7 9.2 0.5 24.6 22.5 22.4 2.2 0.7 38.0 9.1

Noritz 5943.T 774 1,784 n.m. n.m. 18.8 n.m. 17.2 14.5 0.8 1.8 7.5 0.2


Note: Price as of 15 Jan 2016. Source: Company data, Credit Suisse estimates, IBES consensus

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(600690.SS / 600690 CH) 10

Figure 9: Valuation comparison (cont'd)

Mkt Price EPS growth P/E P/B Yield NC/EQT ROE

Cap (Loc (%) (x) (x) (%) (%) (%)

Name Ticker (US$ mn) curr) CY15E CY16E CY17E CY15E CY16E CY17E CY15E CY15E FY0 CY15E

TVs

Hisense Electric 600060.SS 2,913 14.66 -0.5 8.5 7.7 13.8 12.7 11.8 1.6 2.2 26.7 11.8

Skyworth Digital 0751.HK 1,591 4.25 14.7 4.5 4.4 6.5 6.3 6.0 0.8 4.5 4.8 15.3

Changhong 600839.SS 2,755 3.93 n.m. n.m. n.a. n.m. n.m. n.a. 1.4 0.0 -46.8 -6.7

MTC 002429.SZ 2,007 8.25 -6.5 18.5 19.7 21.2 17.9 14.9 2.5 0.5 1.5 12.5

Xiamen Electronic 600870.SS 473 5.95 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 307.2 n.a.

Konka 000016.SZ 1,099 4.53 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -123.7 n.a.

TCL Multimedia 1070.HK 801 4.50 n.m. n.m. 50.5 n.m. 20.5 13.6 1.4 0.7 -109.6 -4.6

BOE 000725.SZ 13,407 2.60 -13.8 12.0 28.6 34.7 31.0 24.1 1.2 0.3 5.3 3.4

Weighted average -8.8 11.5 23.8 28.0 24.8 19.7 1.3 0.8 -1.9 4.6

Kitchenware

Robam 002508.SZ 2,974 40.29 40.9 31.6 32.1 24.6 18.7 14.2 5.6 1.1 64.8 25.5

Supor 002032.SZ 2,384 24.80 22.7 20.7 23.3 18.6 15.4 12.5 3.6 2.0 35.9 19.8

Joyoung 002242.SZ 1,930 16.55 13.3 16.9 28.4 20.9 17.9 13.9 3.7 2.8 36.8 19.3

Xinbao Electrical 002705.SZ 1,190 17.72 40.8 14.5 15.2 25.7 22.4 19.5 3.3 1.0 -13.8 12.9

Ozner Water 2014.HK 437 1.96 -28.6 40.7 n.m. 21.2 15.1 6.0 1.4 0.0 31.3 7.4

Elecpro 002260.SZ 1,330 33.01 -47.6 7.7 n.a. n.m. n.m. n.a. n.m. 0.1 3.7 n.a.

Zhejiang Meida 002677.SZ 981 16.15 -20.4 23.3 22.6 37.6 30.5 24.8 4.8 n.a. 34.9 14.6

Lung Cheong 0348.HK 243 0.32 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 16.9 n.a.


Distributors

Suning Appliance 002024.SZ 12,369 11.03 n.m. n.m. n.m. n.m. n.m. n.m. 3.7 0.0 -29.1 -8.7

GOME 0493.HK 2,351 1.08 10.7 8.2 7.1 14.0 12.9 12.1 0.9 3.4 33.5 7.3

JD.com JD.OQ 37,332 26.99 n.m. n.m. n.m. n.m. n.m. 11.3 6.8 0.0 72.5 -6.2

Weighted average 10.7 8.2 7.1 14.0 12.9 11.4 5.8 0.2 46.6 -6.2

International peers

Samsung Electronics 005930.KS 137,371 1,132,000 -12.7 0.5 7.5 8.5 8.4 7.8 1.0 2.0 20.5 14.4

Mitsubishi Electric 6503.T 20,221 1,102.50 4.9 1.8 7.5 10.5 10.3 9.6 1.2 2.5 8.4 12.2

Panasonic 6752.T 21,623 1,090.50 16.4 18.6 12.8 13.1 11.1 9.8 1.3 1.9 16.4 10.3

Philips PHG.AS 22,480 22.36 19.2 15.6 16.3 14.3 12.4 10.7 1.8 3.8 -19.2 9.2

Whirlpool WHR.N 10,059 128.64 6.6 18.4 15.8 10.6 9.0 7.7 1.9 2.6 -57.3 17.4

LG Electronics 066570.KS 7,644 56,700 6.2 68.2 20.3 24.1 14.3 11.9 0.8 0.7 -54.9 3.6

Electrolux ELUXb.ST 5,929 178.30 -22.1 62.3 14.6 20.3 12.5 10.9 3.0 3.7 -32.1 22.3

Coway 021240.KS 5,960 93,800 26.4 11.8 10.6 22.1 19.8 17.9 5.9 2.7 -5.4 28.6

SEB SEBF.PA 4,951 90.42 24.8 21.5 14.9 21.0 17.3 15.0 2.6 1.8 -36.2 13.3

Arcelik ARCLK.IS 3,256 14.68 26.3 4.1 14.2 12.7 12.2 10.7 2.1 3.7 -71.5 16.6

De Longh DLG.MI 3,779 23.16 14.1 11.4 15.7 23.9 21.4 18.5 4.1 2.0 -3.8 17.7

Weighted average* 12.1 19.8 13.6 15.1 12.5 11.0 1.9 2.6 -14.7 12.9

Total simple average 5.7 17.5 17.3 18.7 15.9 13.3 2.5 1.8 1.4 11.8

Total weighted average 0.4 8.4 10.4 11.7 10.5 10.4 2.2 2.1 12.4 11.6

Note: Price as of 15 Jan 2016. *Excluded Samsung. Source: Company data, Credit Suisse estimates, IBES consensus

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Appendix III: Financial Summary Figure 10: Qingdao Haier – income statement

Rmb mn 2012 2013 2014 2015E 2016E 2017E

Net revenue 79,427 86,172 88,376 79,703 91,232 95,511

Cost of sales -59,704 -64,660 -64,345 -57,251 -65,991 -68,989

Gross profit 19,723 21,512 24,031 22,452 25,242 26,523

S&D expenses -9,629 -10,307 -11,578 -11,637 -13,137 -13,658

Admin expenses -5,189 -5,479 -5,995 -5,499 -6,204 -6,495

Operating profit 4,905 5,726 6,458 5,316 5,900 6,370

EBITDA 5,556 6,396 7,211 6,117 6,786 7,345

Net finance income 87 141 348 365 437 552

FX gains / asset impairment -265 -312 -307 -179 -148 -106

Investment income 543 622 1,237 949 1,031 1,122

Net non-operating income 158 547 310 256 272 355

Profit before taxation 5,428 6,724 8,047 6,707 7,493 8,228

Taxation -1,068 -1,164 -1,354 -1,073 -1,199 -1,317

Minority interests -1,091 -1,386 -1,701 -1,477 -1,650 -1,812

Profit to equity shareholders 3,269 4,174 4,992 4,157 4,644 5,100

Basic EPS (Rmb) 0.609 0.767 0.870 0.682 0.761 0.835

Diluted EPS (Rmb) 0.608 0.766 0.869 0.678 0.757 0.831

DPS (Rmb) 0.37 0.46 0.49 0.20 0.23 0.25

Dividend payout ratio (%) 30.5 30.0 30.0 30.0 30.0 30.0

Reported recurring net profit 3,177 3,759 4,324 3,919 4,534 4,983

Recurring basic EPS (Rmb) 0.592 0.691 0.754 0.643 0.743 0.816

Recurring diluted EPS (Rmb) 0.590 0.690 0.753 0.639 0.739 0.812

Margins (%)

Gross margin 24.8 25.0 27.2 28.2 27.7 27.8

Operating margin 6.2 6.6 7.3 6.7 6.5 6.7

S&D / Sales 12.1 12.0 13.1 14.6 14.4 14.3

Admin / Sales 6.5 6.4 6.8 6.9 6.8 6.8

EBITDA margin 7.0 7.4 8.2 7.7 7.4 7.7

PBT margin 6.8 7.8 9.1 8.4 8.2 8.6

Net margin 4.1 4.8 5.6 5.2 5.1 5.3

Recurring net margin 4.0 4.4 4.9 4.9 5.0 5.2

Effective tax rate 19.7 17.3 16.8 16.0 16.0 16.0

YoY (%)

Net revenue 8.0 8.5 2.6 -9.8 14.5 4.7

Gross profit 15.4 9.1 11.7 -6.6 12.4 5.1

EBITDA 22.5 15.1 12.7 -15.2 10.9 8.2

Operating profit 25.1 16.7 12.8 -17.7 11.0 8.0

PBT 22.9 23.9 19.7 -16.6 11.7 9.8

Net profit 21.5 27.7 19.6 -16.7 11.7 9.8

Recurring net profit 30.3 18.3 15.0 -9.4 15.7 9.9

Diluted EPS 21.9 26.1 13.4 -22.0 11.7 9.8

ROE (%) 33.6 32.6 27.5 17.9 17.6 16.9

ROA (%) 9.7 10.0 9.8 7.6 7.6 7.6

Source: Company data, Credit Suisse estimates

18 January 2016


(600690.SS / 600690 CH) 12

Figure 11: Qingdao Haier – balance sheet

Rmb mn 2012 2013 2014 2015E 2016E 2017E

Cash & cash equivalents 16,284 20,641 28,644 28,948 35,827 40,472

Trade and bills receivables 15,201 20,038 21,731 20,632 26,359 21,266

Inventories 7,099 6,909 7,558 5,931 9,255 6,243

Prepayments & other current assets 1,116 1,672 1,542 1,724 1,931 2,008

Total current assets 39,700 49,260 59,475 57,235 73,372 69,990

PP&E 5,283 5,485 6,971 7,397 7,799 8,175

Construction in progress 1,064 1,604 1,086 1,586 2,086 2,586

Intangible assets 565 672 972 1,372 1,803 2,269

Long term equity investment 2,202 2,321 3,357 3,357 3,357 3,357

Other non-current assets 876 1,751 3,146 3,193 3,242 3,292

Total non-current assets 9,989 11,833 15,532 16,904 18,287 19,679

Total assets 49,688 61,093 75,006 74,139 91,659 89,669

Trade and bills payables 21,078 25,881 27,614 24,775 35,611 27,518

Customer deposits 2,500 3,522 4,218 3,348 3,832 4,011

Tax and other payables 6,665 7,445 8,787 7,593 8,515 8,857

ST & current portion of LT borrowings 1,098 1,198 1,009 1,009 1,009 1,009

Total current liabilities 31,341 38,046 41,628 36,724 48,967 41,396

Convertible bonds issued by Haier Elec 700 717 1,801 1,801 1,801 1,801

Accrued liabilities 2,055 2,163 2,157 2,073 2,326 2,421

Other current liabilities 166 136 300 306 313 319

Total non-current liabilities 2,921 3,016 4,258 4,180 4,440 4,540

Share capital 2,685 2,721 3,046 3,051 3,056 3,061

Reserves 8,443 11,773 18,794 21,595 25,133 28,981

Total shareholders' equity 11,129 14,494 21,840 24,646 28,189 32,042

Minority interests 4,298 5,537 7,280 8,590 10,064 11,692

Total liabilities and equity 49,688 61,093 75,006 74,139 91,659 89,669


Figure 12: Qingdao Haier – cash flow statement

Rmb mn 2012 2013 2014 2015E 2016E 2017E

Pre-tax profit 5,428 6,724 8,047 6,707 7,493 8,228

Taxes paid -907 -1,056 -1,274 -1,112 -1,240 -1,359

Depreciation & amortisation 651 670 753 802 886 975

Associate and investment gains -543 -622 -1,237 -949 -1,031 -1,122

Others -33 -387 -404 -447 -549 -707

Operating cash flow before w/c chg 4,598 5,329 5,885 5,001 5,558 6,015

Net change in working capital 429 660 361 -2,361 2,985 457

Others 104 94 28 -263 105 -11

Operating cash flow 5,131 6,083 6,274 2,376 8,648 6,460

PP&E capex -1,228 -1,757 -2,005 -2,129 -2,222 -2,318

Decrease (Incr.) in Investments 0 -821 -1,860 0 0 0

Others 284 1,481 1,155 1,575 1,729 1,935

Investing cash flow -944 -1,097 -2,711 -554 -492 -383

Dividends paid -938 -1,247 -1,276 -1,666 -1,424 -1,579

Share capital 76 229 719 62 62 62

Net new borrowings 85 85 841 0 0 0

Others 459 152 4,268 85 85 85

Financing cash flow -318 -781 4,552 -1,519 -1,276 -1,431

Net change in cash 3,869 4,205 8,115 304 6,879 4,645


18 January 2016


(600690.SS / 600690 CH) 13

Companies Mentioned (Price as of 15-Jan-2016)

AVIC Aircraft Company Limited (000768.SZ, Rmb18.76) AmSouth Bancorp (ASO.N^K06, $29.82) AmSouth Bancorp (ASO.N^K06, $29.82) Aucma (600336.SS, Rmb5.8) C G Source Engy (8128.HK, HK$0.34) Changhong (600839.SS, Rmb3.93) Chigo Holding (0449.HK, HK$0.1) Chunlan (600854.SS, Rmb6.01) DEA (002260.SZ, Rmb33.01) Daikin Industries (6367.T, ¥7,824) De Longh (DLG.MI, €23.16) DunAnEnvironment (002011.SZ, Rmb16.72) Electrolux (ELUXb.ST, Skr178.3) Fantasia (1777.HK, HK$0.8) GOME Electrical Appliances Holding Limited (0493.HK, HK$1.08) General Electric (GE.N, $28.49) Gree Electric Appliance (000651.SZ, Rmb18.8) Gree Real Estate (600185.SS, Rmb15.47) Haier Electronics Group Co., Ltd. (1169.HK, HK$12.82) Haier Healthwise (0348.HK, HK$0.32) Hisense Electric Co., Ltd (600060.SS, Rmb14.66) Hisense Kelon Electrical Holdings (000921.SZ, Rmb6.86) Hisense Kelon Electrical Holdings (0921.HK, HK$3.24) Homa (002668.SZ, Rmb62.28) Indesit (IND.MI, €10.97) Ingersoll-Rand Plc (IR.N, $51.74) JD.com, Inc. (JD.OQ, $26.99) Jiangsu Sunrain (603366.SS, Rmb8.01) Joyoung (002242.SZ, Rmb16.55) Kingdee (0268.HK, HK$2.77) Konka (000016.SZ, Rmb4.53) LG Electronics Inc (066570.KS, W56,700) Little Swan (000418.SZ, Rmb23.19) MTC (002429.SZ, Rmb8.25) Macro (000533.SZ, Rmb7.59) Meiling (000521.SZ, Rmb5.66) Midea Group (000333.SZ, Rmb28.39) Mitsubishi Electric (6503.T, ¥1,102) Noritz (5943.T, ¥1,784) Panasonic (6752.T, ¥1,090) Qingdao Haier Co., Ltd. (600690.SS, Rmb9.92, NEUTRAL[V], TP Rmb9.8) Rinnai (5947.T, ¥10,810) Robam (002508.SZ, Rmb40.29) SEB (SEBF.PA, €90.42) Samsung Electronics (005930.KS, W1,132,000) Skyworth CN (000810.SZ, Rmb12.67) Skyworth Digital (0751.HK, HK$4.25) Starlake Science (600866.SS, Rmb5.62) Suning Commerce Group Co., Ltd. (002024.SZ, Rmb11.03) Supor (002032.SZ, Rmb24.8) TCL Corporation (000100.SZ, Rmb3.6) Vanward (002543.SZ, Rmb14.29) Vatti (002035.SZ, Rmb13.77) Whirlpool (WHR.N, $128.64) Whirlpool China (600983.SS, Rmb10.98) Xiamen Elec (600870.SS, Rmb5.95) Xinbao Elctrcl (002705.SZ, Rmb17.72) ZHZJ (600765.SS, Rmb15.36) Zhejiang Meida (002677.SZ, Rmb16.15) Zhuhai Port (000507.SZ, Rmb5.59)

Disclosure Appendix

Important Global Disclosures

I, Eva Wang, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

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3-Year Price and Rating History for Qingdao Haier Co., Ltd. (600690.SS)

600690.SS Closing Price Target Price

Date (Rmb) (Rmb) Rating

23-Oct-14 7.70 11.00 O

24-Oct-14 7.76 *

31-Oct-14 8.26 11.55 O

12-Jan-15 10.20 13.50

31-Mar-15 12.92 13.50 N

31-Aug-15 10.04 11.00

27-Oct-15 9.92 10.00

02-Nov-15 9.92 9.80

* Asterisk signifies initiation or assumption of coverage. O U T PERFO RM

N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.

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*Relevant benchmark by region: As o f 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5 %. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011.

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Rating Versus universe (%) Of which banking clients (%)

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Neutral/Hold* 30% (27% banking clients)

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Restricted 1%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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(600690.SS / 600690 CH) 15

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Qingdao Haier Co., Ltd. (600690.SS)

Method: Our 12-month target price of Rmb9.80 for Qingdao Haier is based on a price-to-earnings (P/E) multiple of 13.0x 2016E earnings per share (EPS), with reference to the average of the international peers. We believe the stock is fairly valued and trading at the average of international peer's range. There is a lack of catalyst, therefore we maintain NEUTRAL rating on the stock.

Risk: Risks to our target price of Rmb9.80 and Neutral rating for Qingdao Haier 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) increase in the raw material cost and labor cost, and (4) increase in the industry competition, such as price wars.

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(600690.SS / 600690 CH) 16

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18 January 2016


(600690.SS / 600690 CH) 17

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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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