• 1.6% YoY rise in net profit in 1Q
• Transformation of group underway
• Monitoring upcoming summer sales

Slowdown Is Apparent

Gree Electric Appliances recently reported both its FY18 and 1Q19 results. Net profit rose 17% to RMB26.2b in FY18 while 1Q19 saw a mere 1.6% YoY rise in net profit to RMB5.7b, illustrating the impact of the recent market slowdown. Gree also has a heavier emphasis on air-conditioners compared to peers who are more diversified, and the previous high base for air-conditioners has resulted in a YoY slowdown that is more apparent than peers.

Diversification Is Necessary But Also Brings Along Uncertainties

The group has been seeking to diversify its businesses by expanding into areas such as electric vehicles and batteries, consumer appliances, mobile phones, as well as chipsets and automation. Investments are needed to achieve this and there is lack of clarity with regards to margins with the change in business mix. Though this may be a negative in the near to mid term, it is necessary for the long-term growth strategy of the company.

Waiting for Updates Relating to Stake Sale

Meanwhile, ever since news of the possible stake sale (please refer to our 3 Apr 2019 report, “Potential change in ownership”) was announced, the share price of Gree rose as much as 38% over a span of nine trading sessions. However, the also significant share price correction that resulted subsequently meant that based on 30 Apr’s close of RMB55.58, the share price is now 18% higher compared to the price prior to the news announcement.

Given that the industry may be undergoing a period of channel destocking especially for air-conditioners (upcoming summer season will be closely watched for sales), the recent rally may have already priced in optimism from the stake sale. On the other hand, should a significant price tag relating to the transaction be announced, that may catalyse the share price higher.

A strategic buyer who can inject more capabilities and expertise to Gree may also result in a re-rating. We tweak our assumptions and estimates and based on 11.2x forward P/E, we derive a fair value estimate of RMB51.25 for the stock (prev. RMB48.48). Maintain HOLD.

Source: OCBC Research - 2 May 2019