• Resilience amidst uncertainty
• Premiumisation and IoT to fuel growth
• Trade tensions may still be a dampener

Resilient Amidst Uncertainty; Outperformer Vs. Other Sectors

Shanghai stocks have slid into a bear market with escalating trade tensions with the US and renewed concerns over China’s growth outlook. Stocks in China’s white goods sector, however, have remained resilient and have performed relatively well YTD, aided by a good structural growth story. We believe companies such as Qingdao Haier (Haier) are viewed as safer havens in current erratic market conditions.

Market Leader Across Key Product Categories With Strong Earnings Track Record

Haier is the world’s leading white goods player (13.3% of global market share) that is primarily engaged in the manufacturing and sale of white goods. The group has a dominant market share for products such as refrigerators, washing machines and freezers globally and in China.

Haier’s revenue and net profits have grown by ~22% and ~27% CAGR respectively from FY06 – FY17, demonstrating the group’s strong earnings track record. For FY18-19, we are forecasting earnings growth of about 16-17%.

Premiumisation and IoT to Propel Haier Into a New Era of Growth Over the Longer Term

The group’s premium portfolio (Casarte) and well-recognised brands (Fisher & Paykel, GE Appliances) as well its move into the development of smart home solutions is expected to fuel growth going forward, though time will also be required for this.

A rising middle class in China coupled with the tremendous growth potential of the Internet of Things (IoT) will create further replacement demand as consumers continue to seek upgrades of home appliances that offer them better functionality. For market leaders like Haier, the focus is now on quality and technology.

Based on 14.5x blended FY18/19F earnings, we derive a fair value estimate of RMB20.86 for the stock, translating to a potential upside of 16.1%, including a forecasted dividend yield of 1.9%.

Risks include slowdown in property sales which traditionally affects demand of white goods. However, a pickup in replacement demand from end consumers would mitigate impact of a property slowdown.

A prolonged standoff between the US and China relating to trade may also weigh on sentiment, and curtail any potential overseas acquisition plans that the group may have.

Meanwhile, GIC is a shareholder with a stake that is slightly less than 5%.

Source: OCBC Research - 29 Jun 2018