• Resumes dividend
• Monitoring diversification efforts
• Developing chipset/semicon business

Omitting 2017 Dividend Payment…

Gree’s air-conditioner business has been a relatively successful business and the group has historically paid out about 70% of its profits back to shareholders from FY14-FY16. However, Gree has been looking to diversify beyond its core air conditioners/home appliances space, and omitted its 2017 dividend payment to develop its chipset/semiconductor capabilities.

In 1H18, Gree resumed its dividend, but only for about 28% of profits. Gree’s chairwoman, Ms. Dong Mingzhu, has mentioned that Gree does not want to be just a manufacturer, but a technological innovator. As such, the group hopes to design the chips that will be embedded in white goods and appliances for the Internet of Things era.

… to Develop Chipset/semiconductor Business

In early Dec last year, the group announced that it would invest RMB3b in Wingtech Technology to support the latter’s acquisition of Nexperia Holding, a global semiconductor manufacturer headquartered in Netherlands. This should enhance Gree’s semiconductor positioning, after its earlier RMB1b investment to set up Zhuhai LingbianJie IC Co to develop its semiconductor capabilities.

As for Wingtech itself, it is a designer and manufacturer of electronic devices such as smartphones, and a leading OEM manufacturer for brands like Huawei, Xiaomi and Lenovo.

Investment Risks/concerns

The market will be monitoring the group’s ability to diversify beyond its core air-conditioner segment which still accounted for 83% of FY17 and 1H18 revenue. Other concerns include a lower demand for air-conditioners amidst a property slowdown, as well as more intense price competition amongst peers.

Currently, the stock is trading at around 7.5x blended FY19/20F earnings. Considering that we are forecasting earnings growth of about this level for the next two years, valuation looks fair on a PEG basis. Our FV estimate for the stock is RMB34.85, based on 7.0x earnings.

Source: OCBC Research - 2 Jan 2019