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Deutsche Bank Markets Research
Rating
Buy Asia
China
Consumer
Retail / Wholesale Trade
Company
Qingdao Haier
Date
4 May 2016
Forecast Change
Globalization by establishing own brands
Reuters Bloomberg Exchange Ticker 600690.SS 600690 CH SHH 600690
Forecasts And Ratios
Year End Dec 31 2014A 2015A 2016E 2017E 2018E
Sales (CNYm) 96,525.2 89,351.1 91,661.1 96,906.2 102,733.0
Reported NPAT (CNYm) 5,337.5 4,300.8 4,944.5 5,049.3 5,678.8
DB EPS FD(CNY) 0.93 0.70 0.81 0.82 0.93
OLD DB EPS FD(CNY) 0.87 0.73 0.82 0.95 –
% Change 6.9% -3.2% -1.6% -13.2% –
DB EPS growth (%) 21.3 -24.3 14.8 1.8 12.4
PER (x) 8.7 16.3 10.8 10.6 9.4
EV/EBITDA (x) 2.4 7.1 3.7 3.1 2.4
Yield (net) (%) 3.0 1.9 2.8 2.8 3.2
Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses
the year end close
A true global company; maintaining Buy
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.
Price at 3 May 2016 (CNY) 8.71
Price target - 12mth (CNY) 10.16
52-week range (CNY) 15.83 - 7.50
Shanghai Composite 2,938
Richard Rui-Huang, CFA
Research Analyst
(+852 ) 2203 6202
Anne Ling
Research Analyst
(+852 ) 2203 6177
Key changes
Price target 10.80 to 10.16 ↓ -5.9%
Sales (FYE) 99,113 to 91,661 ↓ -7.5%
Op prof margin (FYE)
7.3 to 7.2 ↓ -0.9%
Net profit (FYE)
5,054.1 to 4,944.5
↓ -2.2%
Source: Deutsche Bank
Price/price relative
4
8
12
16
20
5/14 11/14 5/15 11/15
Qingdao Haier
Shanghai Composite (Rebased)
Performance (%) 1m 3m 12m
Absolute 1.9 5.2 -34.6
Shanghai Composite -2.3 7.2 -33.9
Source: Deutsche Bank
We like Haier’s brand equity and its leading position in the washing machine and refrigerator segment. We believe management has identified the channel management issue and is optimizing the channel management. About 95% of its products sold overseas are own-brand products. We expect the GE Appliance deal to be completed by mid-2016, and it is likely to raise EPS by 15-16% in 2017-18E. Overseas business accounted for 20% of total sales in 2015 after consolidation of Haier Singapore, and is likely to increase to 44% after consolidation of GE Appliance; maintaining Buy.
2016 to continue optimizing sales channel management We expect Qingdao Haier to continue streamlining its sales channel in 2016 and expect it to report organic growth of 3-6% during 2016-18E with bottom-line growth of 5-10% during the same period, mainly driven by GP margin expansion with a focus on development of high-end products. For 2016, we expect NP to grow 15% yoy to RMB4.9bn, including a one-off gain (RMB528m) from the re-classification of Bank of Qingdao (3866.HK, NR) from 1Q16.
GE Appliance to raise NP by 15-16% in 2017-18E We expect GE Appliance to raise Qingdao Haier’s net profit by 15-16% in 2017-18E. In 2016, the increase should be about 10% of Haier’s net profit, as it is likely to start consolidation in 2H16. In our model, we have not factored in the acquisition of GE Appliance, as it is still awaiting approval.
Valuation and risks We maintain our Buy rating, while lowering our DCF-based target price (9.5% COE, 2% long-term growth rate) by 6% to RMB10.16 to reflect the constraint output in air conditioners and the investment for high-end products. We have not factored in the GE deal as it is still awaiting approval. Our target price translates into 12x/11x FY16E/17E PE. Downside company risks include: 1) failure to develop overseas markets, 2) failure to integrate the acquired business, 3) delay in acquiring GE Appliance and 4) the continued connected transaction with Haier Electronics.
4 May 2016
Retail / Wholesale Trade
Qingdao Haier
Page 2 Deutsche Bank AG/Hong Kong
Model updated:03 May 2016
Running the numbers
Asia
China
Retail / Wholesale Trade
Qingdao Haier Reuters: 600690.SS Bloomberg: 600690 CH
Buy Price (3 May 16) CNY 8.71
Target Price CNY 10.16
52 Week range CNY 7.50 - 15.83
Market Cap (m) CNYm 53,333
USDm 8,225
Company Profile
Qingdao Haier is primarily engaged in the manufacture and distribution of household appliances including refrigerators, air conditioners, washing machine, and small household appliances.
Price Performance
4
8
12
16
20
May 14Aug 14Nov 14Feb 15May 15Aug 15Nov 15Feb 16
Qingdao HaierShanghai Composite (Rebased)
Margin Trends
6.46.87.27.68.08.48.89.2
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
05101520253035
-10
-5
0
5
10
15
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
-100
-80
-60
-40
-20
0
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Richard Rui-Huang, CFA
+852 2203 6202 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (CNY) 0.77 0.93 0.70 0.81 0.82 0.93
Reported EPS (CNY) 0.77 0.93 0.70 0.81 0.82 0.93
DPS (CNY) 0.23 0.25 0.22 0.24 0.25 0.28
BVPS (CNY) 5.3 8.1 3.7 4.3 4.9 5.5
Weighted average shares (m) 5,441 5,736 6,108 6,088 6,104 6,104
Average market cap (CNYm) 35,255 46,455 70,064 53,333 53,333 53,333
Enterprise value (CNYm) 18,691 20,883 48,707 28,585 25,064 20,926
Valuation Metrics P/E (DB) (x) 8.4 8.7 16.3 10.8 10.6 9.4
P/E (Reported) (x) 8.4 8.7 16.3 10.8 10.6 9.4
P/BV (x) 1.75 1.13 2.68 2.03 1.79 1.58
FCF Yield (%) 14.0 11.3 4.5 10.7 11.1 12.8
Dividend Yield (%) 3.6 3.0 1.9 2.8 2.8 3.2
EV/Sales (x) 0.2 0.2 0.5 0.3 0.3 0.2
EV/EBITDA (x) 2.8 2.4 7.1 3.7 3.1 2.4
EV/EBIT (x) 3.1 2.7 8.4 4.3 3.7 2.8
Income Statement (CNYm)
Sales revenue 86,172 96,525 89,351 91,661 96,906 102,733
Gross profit 21,856 26,711 25,236 26,285 28,089 29,795
EBITDA 6,790 8,533 6,835 7,753 7,978 8,882
Depreciation 692 860 1,054 1,108 1,178 1,309
Amortisation 0 0 0 0 0 0
EBIT 6,098 7,673 5,781 6,645 6,801 7,574
Net interest income(expense) 46 257 498 259 322 388
Associates/affiliates 580 646 696 765 842 926
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax 6,724 8,576 6,975 7,670 7,965 8,888
Income tax expense 1,164 1,527 1,053 1,158 1,202 1,341
Minorities 1,386 1,711 1,621 1,568 1,713 1,867
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 4,174 5,338 4,301 4,945 5,049 5,679
DB adjustments (including dilution) 0 0 0 17 17 17
DB Net profit 4,174 5,338 4,301 4,962 5,067 5,696
Cash Flow (CNYm)
Cash flow from operations 6,688 7,540 5,678 7,326 7,652 8,633
Net Capex -1,757 -2,270 -2,492 -1,650 -1,744 -1,849
Free cash flow 4,931 5,270 3,186 5,676 5,907 6,784
Equity raised/(bought back) 381 4,987 342 0 0 0
Dividends paid -1,391 -1,468 -1,764 -1,483 -1,515 -1,704
Net inc/(dec) in borrowings 72 2,291 -1,017 0 0 0
Other investing/financing cash flows 364 -496 -7,257 0 0 0
Net cash flow 4,358 10,584 -6,511 4,193 4,392 5,080
Change in working capital 1,523 921 -379 224 509 565
Balance Sheet (CNYm)
Cash and other liquid assets 20,641 31,225 24,715 28,908 33,300 38,380
Tangible fixed assets 6,248 7,373 8,421 8,963 9,529 10,070
Goodwill/intangible assets 0 0 0 0 0 0
Associates/investments 4,679 8,030 11,701 12,467 13,309 14,235
Other assets 29,524 35,720 31,124 31,851 33,502 35,336
Total assets 61,093 82,349 75,961 82,188 89,640 98,021
Interest bearing debt 4,078 6,369 5,351 5,351 5,351 5,351
Other liabilities 36,984 44,057 38,207 39,406 41,610 44,148
Total liabilities 41,062 50,426 43,558 44,757 46,961 49,499
Shareholders' equity 14,494 24,608 22,694 26,155 29,690 33,665
Minorities 5,537 7,315 9,708 11,276 12,989 14,856
Total shareholders' equity 20,031 31,923 32,402 37,431 42,679 48,521
Net debt -16,563 -24,857 -19,363 -23,556 -27,949 -33,029
Key Company Metrics
Sales growth (%) 8.5 12.0 -7.4 2.6 5.7 6.0
DB EPS growth (%) 26.0 21.3 -24.3 14.8 1.8 12.4
EBITDA Margin (%) 7.9 8.8 7.6 8.5 8.2 8.6
EBIT Margin (%) 7.1 7.9 6.5 7.2 7.0 7.4
Payout ratio (%) 30.0 26.4 31.1 29.9 30.0 30.0
ROE (%) 32.6 27.3 18.2 20.3 18.1 18.0
Capex/sales (%) 2.0 2.4 2.8 1.8 1.8 1.8
Capex/depreciation (x) 2.5 2.6 2.4 1.5 1.5 1.4
Net debt/equity (%) -82.7 -77.9 -59.8 -62.9 -65.5 -68.1
Net interest cover (x) nm nm nm nm nm nm
Source: Company data, Deutsche Bank estimates
4 May 2016
Retail / Wholesale Trade
Qingdao Haier
Deutsche Bank AG/Hong Kong Page 3
Company update
Valuation and risks
We expect Qingdao Haier to report organic growth of 3-6% during 2016-18E
with bottom-line growth of 5-10% during the same period, mainly driven by GP
margin expansion with a focus on development of high-end products. For 2016,
we expect NP to grow 15% yoy to RMB4.9bn, including a one-off gain
(RMB528m) from the re-classification of Bank of Qingdao (3866.HK, NR) as a
long-term investment from available for sales in 1Q16.
We lower our FY16-17 sales forecast by 8-11% to reflect the prolonged de-
stocking process and Qingdao Haier’s efforts in restructuring its sales
management (Figure 1). We expect GE Appliance to raise Qingdao Haier’s net
profit by 15-16% in 2017-18E (Figure 2). In 2016, the increase should be about
10% of Haier’s net profit, as it is likely to start consolidation in 2H16. In our
model, we have not factored in the acquisition of GE Appliance, as this deal is
still pending approval and awaiting the audited numbers in PRC GAAP.
Our primary valuation methodology is DCF. As most of Haier’s business comes
from China, we use the China COE (9.5%) provided by Deutsche Bank’s
economics team. We use beta of 1. The long-term growth rate is 2%, which is
in line with our 2.0-2.5% TGR sector assumption for the other consumer stocks
that we cover. Our DCF-based target price is RMB10.16 (old TP RMB10.8). This
translates into 12/11x FY17/18 P/E.
Figure 1: Key changes
Current forecast Previous forecast Market forecast % change vs. previous forecast
Diff from market forecast
RMBm FY16E FY17E FY18E FY16E FY17E FY16E FY17E FY18E FY16E FY17E FY16E FY17E FY18E
Sales 91,661 96,906 102,733 99,113 108,315 94,022 103,638 121,870 -8% -11% -3% -6% -16%
EBIT 6,645 6,801 7,574 7,249 8,296 5,813 6,549 8,048 -8% -18% 14% 4% -6%
Net profit 4,945 5,049 5,679 5,054 5,838 4,956 5,374 6,509 -2% -14% 0% -6% -13% Source: Deutsche Bank estimates, Bloomberg finance LP
Downside company risks include: 1) failure to develop overseas markets, 2)
failure to integrate the acquired business, 3) delay in acquiring GE Appliance
and 4) the continued connected transaction with Haier Electronics.
2016 outlook
Key guidance for 2016 from the earnings conference call
Management expects mid-single-digit and mid-high-single-digit growth for
2016 top-line and bottom-line organic growth, respectively. For overseas
business, management expects sales to grow by double-digits in LCY in key
markets including Europe and Japan. The Russia refrigerator factory is
expected to be put into operation in April 2016.
Capex is budgeted at RMB1.5bn, flattish as in 2015.
M&A plan. It will not have further M&A deals in the short term, but will remain
attentive to potential opportunity in Europe and Latam to expand its business.
4 May 2016
Retail / Wholesale Trade
Qingdao Haier
Page 4 Deutsche Bank AG/Hong Kong
GE Appliance is expected to consolidate in 2H16. The performance of GE
Appliance in 1Q16 was above management’s expectations, and it believes this
is likely to continue in 2016. Haier and GE Appliance have identified more than
100 synergy projects including products, technology, procurement and supply
chain management. It expects to realize these synergy effects after the deal
closure.
Streamline the business structure between Qingdao Haier and Haier
Electronics (1169.HK, Hold). Haier plans to unify white goods manufacturing
into one platform. It is working on proposals, but there is still no timetable, as
this requires minority shareholders’ consent from both sides. The principal of
the proposal is to promote business development for both companies.
Strengthen Kitchenware business. It plans to develop high-end products for
kitchenware business by adopting the strategy of 1) controlling the existing
distribution channel including KA (Gome and Suning) and specific stores, 2)
adding in-store shopping experiences including bakeries and cooking and 3)
offering packaged solutions including water purifiers, air purifiers and smart
appliances to consumers for home decorations.
Refrigerator is expected to gain market share from small brands through 1)
penetrating into the lower-tier market, 2) improving product quality and 3)
moving faster in response to market demands. It also plans to have better
control over retail outlets at the county and town levels, and will further extend
its distribution to the village level.
Air conditioner business is expected to recover in 2016, as 1) its products are
newly launched (peers are selling old model products with ex-factory date in
2014-15), 2) its distributors should be more profitable in 2016 than its peers
and 3) it should better control the distribution channel.
For the overseas market, it plans to 1) continue promoting its own brands with
a focus on the mid-high-end segment – the Haier brand is 95% of its total
overseas sales – and 2) localize manufacturing – it is planning localized
manufacturing in India and Pakistan. To recap, its refrigerator factory in Russia
was put into operation in April 2016.
Sales channel optimization. Haier should focus on marketing its product
quality and appeal to consumers by selling user-friendly and healthy products.
It should continue to optimize its sales channel by 1) integrating online channel
management to eHaier by May 2016; 2) establishing a Haier club by allying 58
local distributors including Wuhan Gongmao, Changsha Baida and Baotou
Tongli etc.; 3) adding 100 home decoration solution stores by end-2016 and 4)
helping specific stores develop in Tier 2 and Tier 3 cities by offering more
marketing resources.
1Q16 review
1Q16 Recurring NP declined 3% yoy to RMB968m, on an 8% yoy decline in
sales revenue to RMB22bn. GP margin improved 1.1 ppts, partly offset by a 0.8
ppts increase in opex ratio. Management believes that it performed better than
the overall industry. Key takeaways from the earnings conference call are the
following:
4 May 2016
Retail / Wholesale Trade
Qingdao Haier
Deutsche Bank AG/Hong Kong Page 5
Domestic sales by product category
Refrigerator – Sales value increased in 1Q16 after sales volume picked up in
4Q15. This is attributable to the development in the third- and fourth-tier
channels. Haier believes that it has competitive advantages in 1) full product
range offerings including low- to high-end products, 2) advanced technology in
dry/wet separation storage and 3) a leading position in distribution channels
including online, KA and specialty stores.
Washing machine is expected to bottom up from its trough at the end of 2015.
Haier carried out a restructuring program for its washing machine business
during January-February 2016. The detailed restructuring items include 1)
offering a full product range including low- and high-end products, 2) de-
stocked inventory including channel inventory and its own inventory by
adopting the make-to-order model and 3) downsized product models by
cutting half of SKUs. Management believes that these initiatives will improve
its competitiveness.
Air conditioner – products upgrade to mid-high-end market. Haier has
upgraded its product offerings from the low-end products to the mid-high-end
products. It should differentiate its products from peers with a focus on user-
friendly and health functions.
Water heater – quality-driven strategy. Haier plans to maintain its product-
quality-driven strategy in water heater in 2016. It should continue to improve
product quality, with a focus on mid-high-end products. This should improve
its overall ASP in 2016.
Overseas performance by market Japan – growth momentum should continue in 1Q16 (+20% yoy in lcy).
India and Pakistan – it aims to range in the top position in 2016 with 1.5-2x industry growth.
America – it has completed a Venezuela government project.
Europe – sales grew 22%/15% in lcy in 2015/1Q16.
Russia – it launched the localized refrigerator with growth of 76%/50% in 2015/1Q16 in lcy.
Middle East and Africa –volatile FX should impact payment.
Figure 2: GE Appliance assumptions
YE Dec, USDm 2016E 2017E 2018E
Sales 6,450 6,643 6,843
yoy change 3% 3% 3%
EBITDA 548 565 582
yoy change -1% 3% 3%
EBITDA margin 9% 9% 9%
D&A 210 212 214
EBIT 338 353 367
EBIT -2% 4% 4%
EBIT margin 5.2% 5.3% 5.4%
Finance cost @2.5% pa 81 81 81
PBT 257 272 286
Tax (ETR 40%) (103) (109) (115)
Net profit 154 163 172
yoy change na 6% 5%
NP in RMBm 957 1,010 1,065
Source: Deutsche Bank estimates
4 May 2016
Retail / Wholesale Trade
Qingdao Haier
Page 6 Deutsche Bank AG/Hong Kong
Figure 3: P&L Adjusted
YE Dec RMBm 2013A 2014A 2015A 2016F 2017F 2018F
Net sales 86,172 96,525 89,351 91,661 96,906 102,733
COGS (excl dep) (64,316) (69,815) (64,115) (65,376) (68,817) (72,938)
Gross profit 21,856 26,711 25,236 26,285 28,089 29,795
GP margin 0 0 0 0 0 0
Other income 372 712 739 1,127 667 745
SG&A (16,130) (19,749) (20,193) (20,767) (21,956) (22,967)
EBIT 6,098 7,673 5,781 6,645 6,801 7,574
Finance cost 46 257 498 259 322 388
Associate 580 646 696 765 842 926
Extraordinary 0 0 0 0 0 0
PBT 6,724 8,576 6,975 7,670 7,965 8,888
Taxation (1,164) (1,527) (1,053) (1,158) (1,202) (1,341)
MI (1,386) (1,711) (1,621) (1,568) (1,713) (1,867)
Net profit 4,174 5,338 4,301 4,945 5,049 5,679 Source: Deutsche Bank estimates, company data
Figure 4: P&L PRC GAAP
YE Dec RMBm 2013A 2014A 2015A 2016F 2017F 2018F
Gross sales 86,606 96,930 89,748 92,045 97,312 103,164
Cost of goods sold (64,660) (70,170) (64,658) (65,714) (69,174) (73,317)
Gross profit 21,945 26,759 25,090 26,331 28,138 29,847
Business taxes (433) (405) (397) (384) (406) (431)
Sales expense (10,307) (12,580) (13,101) (13,713) (14,497) (15,060)
Admin expense (5,479) (6,813) (6,549) (6,717) (7,101) (7,528)
Core EBIT 5,726 6,962 5,042 5,518 6,134 6,829
Finance income 46 257 498 259 322 388
Core operating profit 5,772 7,219 5,540 5,777 6,456 7,217
Provision for impairment (217) (223) (318) (276) (292) (309)
G/L on the changes in fair value 0 112 (90) 0 0 0
Income from investments 622 1,193 1,320 1,743 1,337 1,471
Operating profit 6,176 8,300 6,452 7,244 7,501 8,378
Non-operating income 602 378 618 531 580 638
Non-operating expenses (55) (102) (96) (106) (116) (128)
Profit before taxation 6,724 8,576 6,975 7,670 7,965 8,888
Taxation (1,164) (1,527) (1,053) (1,158) (1,202) (1,341)
Net Profit 4,174 5,338 4,301 4,945 5,049 5,679 Source: Deutsche Bank estimates, company data
4 May 2016
Retail / Wholesale Trade
Qingdao Haier
Deutsche Bank AG/Hong Kong Page 7
Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
Qingdao Haier 600690.SS 8.71 (CNY) 3 May 16 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=600690.SS
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Richard Rui-Huang
Historical recommendations and target price: Qingdao Haier (600690.SS) (as of 5/3/2016)
12
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
May 14 Aug 14 Nov 14 Feb 15 May 15 Aug 15 Nov 15 Feb 16
Secu
rity
Pri
ce
Date
Previous Recommendations
Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating
Current Recommendations
Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002
1. 07/10/2015: Upgrade to Buy, Target Price Change CNY11.51 2. 15/02/2016: Buy, Target Price Change CNY10.80
4 May 2016
Retail / Wholesale Trade
Qingdao Haier
Page 8 Deutsche Bank AG/Hong Kong
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock
Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.
Newly issued research recommendations and target prices supersede previously published research.
54 %
36 %
10 %18 %16 % 16 %
050
100150200250300350400450500
Buy Hold Sell
Asia-Pacific Universe
Companies Covered Cos. w/ Banking Relationship
Regulatory Disclosures
1.Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2.Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are
consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the
SOLAR link at http://gm.db.com.
4 May 2016
Retail / Wholesale Trade
Qingdao Haier
Deutsche Bank AG/Hong Kong Page 9
Additional Information
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively
"Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources
believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness.
If you use the services of Deutsche Bank in connection with a purchase or sale of a security that is discussed in this
report, or is included or discussed in another communication (oral or written) from a Deutsche Bank analyst, Deutsche
Bank may act as principal for its own account or as agent for another person.
Deutsche Bank may consider this report in deciding to trade as principal. It may also engage in transactions, for its own
account or with customers, in a manner inconsistent with the views taken in this research report. Others within
Deutsche Bank, including strategists, sales staff and other analysts, may take views that are inconsistent with those
taken in this research report. Deutsche Bank issues a variety of research products, including fundamental analysis,
equity-linked analysis, quantitative analysis and trade ideas. Recommendations contained in one type of communication
may differ from recommendations contained in others, whether as a result of differing time horizons, methodologies or
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Analysts are paid in part based on the profitability of Deutsche Bank AG and its affiliates, which includes investment
banking revenues.
Opinions, estimates and projections constitute the current judgment of the author as of the date of this report. They do
not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no
obligation to update, modify or amend this report or to otherwise notify a recipient thereof if any opinion, forecast or
estimate contained herein changes or subsequently becomes inaccurate. This report is provided for informational
purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any
particular trading strategy. Target prices are inherently imprecise and a product of the analyst’s judgment. The financial
instruments discussed in this report may not be suitable for all investors and investors must make their own informed
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investment. Past performance is not necessarily indicative of future results. Unless otherwise indicated, prices are
current as of the end of the previous trading session, and are sourced from local exchanges via Reuters, Bloomberg and
other vendors. Data is sourced from Deutsche Bank, subject companies, and in some cases, other parties.
Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise
to pay fixed or variable interest rates. For an investor who is long fixed rate instruments (thus receiving these cash
flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a
loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the
loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse
macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation
(including changes in assets holding limits for different types of investors), changes in tax policies, currency
convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and
settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed
income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to
FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the
index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended
to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon
rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is
also important to acknowledge that funding in a currency that differs from the currency in which coupons are
denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to
the risks related to rates movements.
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Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk.
The appropriateness or otherwise of these products for use by investors is dependent on the investors' own
circumstances including their tax position, their regulatory environment and the nature of their other assets and
liabilities, and as such, investors should take expert legal and financial advice before entering into any transaction similar
to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can
be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be
incurred that are greater than the amount of funds initially deposited. Trading in options involves risk and is not suitable
for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized
Options”, at http://www.optionsclearing.com/about/publications/character-risks.jsp. If you are unable to access the
website please contact your Deutsche Bank representative for a copy of this important document.
Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i)
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affected by the currency of an underlying security, effectively assume currency risk.
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4 May 2016
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Deutsche Bank AG/Hong Kong Page 11
Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are
not disclosed according to the Financial Instruments and Exchange Law of Japan.
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Copyright © 2016 Deutsche Bank AG
David Folkerts-Landau Chief Economist and Global Head of Research
Raj Hindocha Global Chief Operating Officer
Research
Marcel Cassard Global Head
FICC Research & Global Macro Economics
Steve Pollard Global Head
Equity Research
Michael Spencer Regional Head
Asia Pacific Research
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Deutsche Bank Research, Germany
Andreas Neubauer Regional Head
Equity Research, Germany
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