Haier Electronics Group Co Overweight · Haier Electronics Group Co Overweight 1169.HK, ... Any...

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Asia Pacific Equity Research01 February 2016

Haier Electronics Group CoOverweight1169.HK, 1169 HK

Further Thoughts on Qingdao Haier/GE deal, Earnings Revisions, FY15 Result Preview

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Price: HK$13.72

Price Target: HK$18.00Previous: HK$20.00

China

Consumer

Shen Li, CFA AC

(852) 2800 8523

[email protected]

Bloomberg JPMA SHLI <GO>

Ebru Sener Kurumlu

(852) 2800-8521

[email protected]

George Hsu

(852) 2800-8559

[email protected]

Dylan Chu

(852) 2800-8537

[email protected]

J.P. Morgan Securities (Asia Pacific) Limited

YTD 1m 3m 12mAbs -8.7% -8.7% -8.8% -33.4%Rel 3.8% 3.8% 12.9% -3.7%

Haier Electronics Group Co (Reuters: 1169.HK, Bloomberg: 1169 HK)

Rmb in mn, year-end Dec FY13A FY14A FY15E FY16E FY17ERevenue (Rmb mn) 62,263 67,134 62,097 62,828 67,485Net Profit (Rmb mn) 2,037 2,447 2,670 2,472 2,817Diluted EPS (Rmb) 0.78 0.90 0.96 0.88 1.00Recurring EPS (Rmb) 0.80 0.92 0.89 0.88 1.01DPS (Rmb) 0.08 0.09 0.09 0.08 0.09Revenue growth (%) 12.0% 7.8% (7.5%) 1.2% 7.4%Net Profit growth (%) 20.2% 20.1% 9.1% (7.4%) 14.0%Recurring profit growth 20.2% 19.9% 0.1% 1.2% 14.0%EPS growth (%) 18.1% 14.9% 7.1% (8.8%) 13.6%ROE 31.7% 26.4% 19.1% 15.9% 15.7%ROA 10.5% 10.3% 8.8% 8.2% 8.5%P/E (x) 14.8 12.9 12.1 13.2 11.6P/BV (x) 4.0 2.9 2.2 2.0 1.7EV/EBITDA (x) 8.2 6.2 6.2 5.6 4.3Dividend Yield 0.7% 0.8% 0.8% 0.7% 0.8%Source: Company data, Bloomberg, J.P. Morgan estimates.

Company DataShares O/S (mn) 2,687Market Cap (Rmb mn) 31,133Market Cap ($ mn) 4,734Price (HK$) 13.72Date Of Price 01 Feb 16Free Float(%) -3M - Avg daily vol (mn) 3.673M - Avg daily val (HK$ mn) 51.993M - Avg daily val ($ mn) 6.7HSCEI 8241.36Exchange Rate 7.79Price Target End Date 31-Dec-16

See page 17 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan 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.

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Feb-15 May-15 Aug-15 Nov-15 Feb-16

Price Performance

1169.HK share price (HK$)

HSCEI (rebased)

Qingdao Haier announced further details of its GE Appliances acquisition. Key takeaways: 1) in the US, GE Appliances will continue to manage/enhance its brand position; Haier could leverage its existing product portfolio to add differentiated offerings to GE's US product lines. 2) In the Chinese market, GE can leverage the strong distribution channel and local expertise of Qingdao Haier to launch localised products. 3) Qingdao Haier currently sells through the retail channel in the US, while GE has established channels across both retail and contract channels. The Haier brand can leverage GE's existing relationships through the US retail channel. GE also has long-term relationships with home owners, property developers, property management agencies and hotel operators. The Haier brand can also leverage off GE's strong position in these channels. 4) For first 20 years, Qingdao Haier has the global right to use GE brands and pay 0% royalty fees on both exclusive (food preparation, food preservation, household cleaning, household comfort appliances) and non-exclusive products (water purifier products). For the next two ten-year periods, Qingdao Haier can choose to extend the global right to use GE brands and pay 0.50% royalty fees on exclusive products and 0.25% on non-exclusive products. 5) Qingdao Haier expects incremental interest expense to be US$76-113m.

Haier Electronics remains our top pick. Haier Electronics currently trades at a forward P/E of ~13x, with net cash accounting for ~28% of market cap. While sales momentum has slowed, we believe multiple re-rating catalysts remain, particularly with respect to asset acquisitions/injections, growth in smart home appliances and growth in logistics profitability.

http://www.hibor.com.cn/

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Shen Li, CFA(852) 2800 [email protected]

Key catalysts for the stock price: Upside risks to our view: Downside risks to our view:

Upcoming quarterly results reported by Haier Electronics.Any announcement regarding M&A or strategic partnerships.

(1) Any upturn in demand for household appliances in China; (2) Any improvement in the channel inventory position of the company and air conditioner industry in general

(1) Further weakness in the home appliances industry in China; (2) Risk that Haier loses market share in air conditioner segment; (3) Risk of intensifying competition

Key financial metrics FY14A FY15E FY16E FY17E Valuation and price target basis

Revenues (LC) 67,134 62,097 62,828 67,485 Our Dec-16 PT of HK$18 is based on a target P/E of 15x

and our earnings forecasts for the year ending Dec-16. Revenue growth (%) 8% -8% 1% 7%EBITDA (LC) 3,158 3,132 3,212 3,669

EBITDA margin (%) 5% 5% 5% 5%Tax rate (%) 21% 19% 19% 19%Net profit (LC) 2,447 2,670 2,472 2,817

EPS (LC) 0.90 0.96 0.88 1.00

EPS growth (%) 15% -2% -1% 14% Haier Electronics One-year forward PE

DPS (LC) 0.09 0.09 0.08 0.09BVPS (LC) 4.06 5.21 5.90 6.79

Operating cash flow (LC mn) 2,911 2,821 2,741 3,201Free cash flow (LC mn) 1,952 1,365 1,705 2,240

Interest cover (X) NM NM NM NMNet margin (%) 4% 4% 4% 4%

Sales/assets (X) 2.72x 2.18x 2.04x 2.00xDebt/equity (%) 15% 8% 7% 6%

Net debt/equity (%) -75% -61% -62% -65%ROE (%) 26% 19% 16% 16%

Key model assumptions FY14A FY15E FY16E FY17E

Sales growth -7.5% 1.2% 7.4%

Gross Margins 15.5% 15.9% 16.2%EBIT Margins 4.7% 4.7% 4.9%

Source: Company, J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan estimates.

Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimates

Sensitivity to FY15E FY16E FY15E FY16E EPS (RMB) FY15E FY16E

1pp decrease in sales growth -1.0% -1.9% -1.1% -2.0% JPMe old 0.97 0.95

10bps decrease in Gross margin -1.0% -1.9% -1.1% -1.8% JPMe new 0.96 0.88

10bps decrease in EBIT Margin -1.0% -1.9% -1.1% -1.8% % chg -1.6% -7.5%Consensus 1.00 1.07

Source: J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan estimates.

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Qingdao Haier announces acquisition of GE Appliances

Transaction overview

Qingdao Haier announced on 15-Jan-2016 that it had entered into an agreement with General Electric (GE US, Covered by J.P. Morgan Analyst Steve Tusa) to acquire GE’s home appliance assets for a cash consideration of US$5.4bn, pending regulatory approval.

Qingdao Haier intends to finance ~40% of the transaction with internal cash resources and ~60% with external USD debt financing.

Concurrently, Haier Group and GE have entered into a long-term strategic partnership to explore co-operation in areas of industrial internet, healthcare and advance manufacturing.

GE had previously agreed to sell its home appliances assets to Electrolux (ELUXB SS, Covered by J.P. Morgan Analyst Andreas Willi) for US$3.3bn cash in Sep-2014. However, the transaction failed to gain regulatory approval due to antitrust concerns. On 1-Jul-15, the US Department of Justice sued Electrolux and GE to stop the proposed acquisition. On 7-Dec-15, GE terminated its agreement with Electrolux while the court procedure was still pending. Following the termination of the deal with Electrolux, GE restarted the sale process to dispose of its appliances unit, with news reports that both Midea and Qingdao Haier were among bidders for the assets (see Bloomberg, 12-Jan-2016).

The transaction is structured as an asset sale with no net cash/debt position being transferred. As part of the transaction, Qingdao Haier expects to receive a material amount of tax savings due to assets acquired being able to be amortised. Including the benefit of such tax savings, the US$5.4bn consideration implies an EV/EBITDA valuation of 8.2x (2015 expected EBITDA). Based on GE’s announcement, the transaction value implies ~10x last 12 months EBITDA. We note that the Electrolux/GE transaction was priced at an EBITDA multiple range of 7.0-7.3x pre-synergies (on FY14 earnings).

Details of target assets and industry overview

General Electric derives ~90% of sales from the US and is the number two player in the US major appliance market, which is expected to grow at a CAGR of 3.3% over 2016-2020.

Kitchen appliances are its largest category representing 34% of overall sales, followed by refrigerators and washing machines.

The transaction also includes GE’s 48.4% ownership in Mabe, a leading player in Mexico’s whitegoods market with strong brand recognition across Latin America.

Haier will have the global right to use the GE brand name for 40 years (with the first 20 not attracting royalty fees).


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Table 1: GE Appliances 2015 year-to-September sales and contribution margin by category (US$m)

Category Sales % Contribution margin %Kitchen appliances 1,386 34% 438 45%Refrigerator 1,166 29% 245 25%Washing machine 783 19% 127 13%Dish washer 383 9% 87 9%Home care 341 8% 71 7%Total 4,059 100% 968 100%

Source: Company data.

Table 2: GE Appliances Key Balance Sheet Data (US$m)

Dec-13 Dec-14 Sep-15Assets 2,881 3,238 3,535Liabilities 1,437 1,398 1,642Owner's equity 1,444 1,840 1,893

Source: Company data

Table 3: GE Appliances Key Income Statement Data (US$m)

2013 2014 2015 Year-to-Sep

Sales 5,783 5,908 4,658EBIT 176 200 223EBIT margin 3.0% 3.4% 4.8%

Source: Company data

Figure 1: GE Appliances Manufacturing Base

Source: Company reports

Table 4: Global Home Appliance Industry Growth Trends

US$bn Market size 2010-2015 CAGR 2015-2020E CAGRNorth America 42.1 4.1% 5.5%Europe 54.5 -1.9% 4.8%Asia Pacific 80.2 6.3% 6.3%Middle East and Africa 8.8 0.2% 7.8%Latin America 22.5 0.6% 3.6%Australasia 3.7 -1.0% 4.2%Global 211.8 2.4% 5.9%

Source: Euromonitor


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Table 5: US Major Appliance Market Breakdown (US$b, 2015)

Refrigerator 15.5Kitchen appliances 10.2Washing machines 9Dish washer 4.4Air conditioner 2.1Other 17.7

Source: Euromonitor

Figure 2: Breakdown of US Major Appliance Market

Source: Euromonitor

Key takeaways from briefing

Qingdao Haier management hosted an analyst briefing on 16-Jan-2016 following this deal announcement. Our key takeaways are as follows:

The transaction is expected to be EPS accretive in the first year of integration.

GE home appliance EBITDA has grown by ~50% since the time Electrolux had signed its deal with GE, with the key drivers of the improving EBITDA performance having been returns on ~US$1bn investment in product upgrades, brand revitalisation, and modernisation of factory capacity.

As part of the deal, Qingdao Haier receives the right to use the GE brand globally for 40 years. The first 20 years will be royalty-free. There are two further ten-year periods where a royalty fee will be imposed (and the rate reviewed at the end of the period).

Qingdao Haier intends to fund the transaction with cash and borrowings and does not plan to raise equity. Qingdao Haier intends to raise ~US$3bn of 3-5 years notes.

Qingdao Haier management does not expect its combined entity debt/asset ratio to be greater than 70% and expect the GE assets to generate more than sufficient cash flow to cover interest payments.

GE assets will remain independently managed by the GE management teams, with an independent board to be appointed and incentive programs to be devised.

Qingdao Haier management expects there to be a separate Chinese team to manage the introduction of the GE brand into China and management sees opportunities for expansion of the brand to other global markets.

GE will bear pension obligations incurred prior to deal close, while Haier will bear pension liabilities after change of ownership.

Refrigerator26%

Kitchen appliances17%

Washing machines15%

Dish washer8%

Air conditioner4%

Other30%


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Further clarification following questions from Shanghai Stock Exchange

Following Qingdao Haier’s announcement, the Shanghai Stock Exchange released a further announcement detailing a list of questions to Qingdao Haier for response. We summarise Qingdao Haier’s response below.

#1: How will Qingdao Haier ensure the stability of GE’s distribution channel? Ensuring the stability the GE’s existing distribution channel is the most important

goal of the integration and Qingdao Haier aims to take the following steps:

Qingdao Haier will effectively communicate with existing clients to raise their awareness of and maintain their confidence in the combined entity.

Qingdao Haier will ensure the continuity and consistency of all existing contracts.

Qingdao Haier will devise incentive plans to retain key management and salesforce.

Qingdao Haier will cooperate with GE channels in areas of supply chain, quality control and productivity on the cost side and in areas of R&D, niche markets, and coordinated product launches on the sales side.

#2: Will change of ownership affect consumer perceptions of the GE brand? Within the US market, GE will continue to manage and enhance brand

recognition. Qingdao Haier will set up a brand committee managed primarily by GE to oversee the licensing and utilization of GE brands. Concurrently, Qingdao Haier will proactively support the GE brands with long-term investments. Qingdao Haier has acquired relevant experience through the acquisitions of Sanyo Japan and Fisher & Paykel assets.

Qingdao Haier will continue to launch competitive and innovative products in the US market. Qinghao Haier could leverage its deep product portfolio to add innovative and differentiated offerings to GE's US product lines. For example, Qingdao Haier's Blue Ocean large-capacity refrigerators, advanced wine cabinets, and low-noise air conditioners could contribute to GE’s portfolio in the US.

In the Chinese market, GE can leverage the strong distribution channel and local expertise of Qingdao Haier to successful launch localised products. Qingdao Haier has extensive experience in brand building in China as reflected in the brand value of Haier and the successful management of the high end brand, Casarte.

In other markets, GE could launch targeted product leveraging Qinghao Haier's established R&D centers and distribution channels.

#3: Will the acquisition affect Qingdao Haier’s existing overseas operations? Qingdao Haier does not believe the acquisition of GE assets will materially affect

its existing overseas businesses. Qingdao Haier believes that GE’s product portfolio is complementary to Qingdao Haier's with 90% of GE’s sales in the US market.

Prior to the acquisition, Qingdao Haier's existing US market sales were primarily in niche market segments instead of the mainstream market segments.

In addition, GE's portfolio is particularly strong in kitchen appliances whereas Qingdao Haier primarily focuses on refrigerators, washing machines and air conditioners.


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#4: How will Qingdao Haier leverage GE’s channel to expand the Haier brand presence in the US? Qingdao Haier currently sells through the retail channel in the US while GE has

established channels across both retail and contract channels.

In the retail channel, GE has close partnerships with Sears, Lowe’s, Home Deport and Best Buy. GE Appliances employs regional sales managers in nine key states. The Haier brand can leverage GE’s strong relationships and offer differentiated products through the US retail channel.

GE also has long-term relationships with home owners, property developers, property management agencies, and hotel operators. GE Appliances employs regional sales managers in seven key states. In addition, GE has established a B2B ecommerce platform, ‘GE CustomerNet’). The Haier brand can also leverage off GE's strong positioning in the contract channel.

#5: Integration risks and integration plans GE Appliances’ operations are mainly located in the US. There are significant

differences in law and compliance, accounting and taxes, business conventions, and corporate culture in the US relative to China.

In order to realise the potential synergies, Qingdao Haier and GE has to integrate in areas of financial management, customer relation management, business strategy and corporate culture. In the absence of a smooth integration, Qingdao Haier may face risks of key personnel losses and declining profitability.

To facilitate the process, Qingdao Haier proposes the concept of ‘light integration’ and will focus more on the revenue synergies instead of cost synergies. Key measures include:

Ensure adequate GE representation in the Board of Directors and key management positions.

Establish brand committee primarily managed by GE.

Management independence: ensure independent operations of the local teams and sufficiently support R&D, branding and advanced manufacturing functions.

Keep in place the existing management and compensation structure and offer incentive plans to key talent.

Evaluate and compare the commonality and differences in corporate cultures and encourage cultural exchanges.

Qingdao Haier believes that it has such ‘light integration’ expertise through past acquisitions. For example:

Five out of seven Fisher and Paykel directors are local.

Fisher and Paykel brands were successfully repositioned driven by original management.

Sanyo and Fisher & Paykel are independently managed by the local team.

Fisher & Paykel brand market share increased from 38% at the time of acquisition to 46% now and Fisher & Paykel R&D team expanded to 370 staff from 200.


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100% of key Fisher & Paykel management has been retained.

The Sanyo acquisition involved six countries, four factories and two R&D centers and has become a case of success of cultural integration.

#7: Further details regarding brand rights and royalty fee structure In the first 20 years (Year 0-20), Qingdao Haier has the global right to use GE

brands and pay 0% royalty fees on both exclusive and non-exclusive products. For other products that Qingdao Haier distributes with GE’s consent, Qingdao Haier pays 1% of net sales as royalty fees.

During the next two ten-year periods (Year 20-30 and Year 30-40), Qingdao Haier can choose to extend the global right to use GE brands and pay 0.50% royalty fees on exclusive products and 0.25% on non-exclusive products. For other products that Qingdao Haier distributes with GE’s consent, Qingdao Haier pays 1% of net sales as royalty fees.

During the second ten-year period (Year 30-40), GE has the option to terminate the licensing agreement.

Exclusive products refer to: 1) food preparation appliances: gas stove, electric stove, oven, grill, microwave, rice cookers, and coffee machines; 2) food preservation appliances: refrigerators, freezers, and wine/beverage cabinet/cooler; 3) household cleaning appliances: washing machines, drier, steam wardrobe, dish washer, trash disposer; 4) household comfort appliances: water heater, non-industrial air conditioner, air purifier and air dehumidifier; 5) Other products offered by GE appliance division or under development at the time of acquisition.

Non-exclusive products refer to home water purifier and related products.

#8: Existence of non-compete agreements Qingdao Haier and GE have reached agreement that during the initial five-year

period from time of completion, GE and related companies will not directly or indirectly operate home appliance businesses in any part of the world.

The non-compete agreement allows for the following: 1) finance related activities; 2) businesses not related to home appliances; 3) small scale investment permissible under the Equity and Asset Purchase Agreements; 4) home appliance businesses as part of the future acquisition by GE and related companies, within a certain size as prescribed in the Equity and Asset Purchase Agreements.

#9: Additional information regarding fairness of transaction consideration The transaction consideration of US$5.4b is higher than the US$3.3b offered by

Electrolux for the following reason:

Material improvement in the profitability of the acquired assets. FY15 EBIT and EBITDA are expected to grow by 84% and 47% over FY13 level, respectively.

Significant synergies and strategic fit between Qingdao Haier and GE assets as previously elaborated.

Compared to Electrolux deal, Qingdao Haier transaction is expected to generate more tax benefits

This transaction is priced at a LTM EV/EBITDA multiple slightly lower than the 9.8x of global peers.


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Table 6: Global Home Appliance Valuation Comparison

LTM EV/EBITDAAO Smith 12.5Arcelik 9.4Daikin 9.4Whirlpool 7.8Electrolux 5.9Average ex Electrolux 9.8

Source: Company data (Factset).

#10 Additional information regarding amount of goodwill created and the impairment risks As the transaction is still in progress, the final amount of goodwill to be

accounted has yet to be finalised.

Based on currently available information, the difference between the transaction consideration and GE assets' book value is ~US$3.5bn. This value, however, will need to be adjusted for: 1) the difference between the fair value and book value of the acquired assets; 2) newly identifiable intangible assets; and 3) any differences in accounting principles.

Qingdao Haier believes that the likelihood of future goodwill impairment is low given the stable profitability of the acquired assets and significant synergies that may be generated as integration deepens.

#11: What will happen to GE’s 30% stake in its JV with Little Swan? Little Swan and GE have a 70/30 JV, which primarily manufactures washing

machines. Sales for the JV were ~RMB220m in FY14, with the JV generating profit for ~RMB14m.

According information supplied by GE, till January 27, 2016, GE China had not yet been notified by Wuxi Little Swan regarding the potential exercise of its Little Swan’s right to acquire the 30% stake in the GE Little Swan JV.

GE will keep Qingdao informed about the progress.

#12: Additional information on transaction financing and impact on Qingdao Haier financials Qingdao Haier has received binding commitments from the banks to provide the

bridge loans required for the completion of the transaction. In this light, the risk of inadequate financing is low.

The expected financing for the transaction is US$3.24bn.

As Qingdao Haier has yet to finalise the financing plans, the exact interest rate and financing expenses are uncertain.

Qingdao Haier expects incremental interest expense to be in the range of US$76-113m, before the tax savings on interest expense.


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J.P. Morgan comment – implications for Haier Electronics

We think this transaction is an incremental positive for Haier Electronics (1169 HK) over the longer term.

As the distributor of all of Haier Group’s products in China, Haier Electronics will in the near future be able to distribute GE branded products throughout China. We believe this represents an additional source of revenue for Haier Electronics with limited additional capital outlay/investment.

Furthermore, GE’s strength in kitchen appliances in the US market will likely help Haier Electronics’ distribution business to expand its business in the kitchen category in China.

Despite Haier Electronics being a subsidiary of Qingdao Haier and its financials being consolidated into Qingdao Haier’s financials, we do not expect Qingdao Haier to use any of the cash on the Haier Electronics balance sheet to be used to fund the acquisition.


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Global trading comps

Table 7: Consensus Trading Multiple Comparisons

Mkt Cap P/E EV/EBIT Dividend Yield

US$m NTM FY+1 FY+2 FY+3 NTM FY+1 FY+2 FY+3 NTM FY+1 FY+2 FY+3ChinaGree 17,136 7.4 7.9 7.2 6.4 2.4 2.6 2.4 2.2 7.7% 6.8% 7.2% 7.7%Midea 17,717 8.7 9.4 8.0 6.9 6.6 8.2 6.7 5.8 4.2% 4.4% 5.1% 6.3%Qingdao Haier 8,544 10.0 11.8 10.0 9.2 7.5 9.2 7.5 6.8 3.2% 3.0% 3.2% 3.1%Haier Electronics 4,897 11.2 11.2 10.6 9.4 7.6 7.6 6.8 6.2 0.9% 0.9% 0.9% 1.1%Hisense 2,818 11.5 12.8 11.2 9.9 9.8 11.0 9.4 8.0 2.3% 2.3% 2.8% 3.0%Robam 2,858 19.4 23.1 18.5 13.9 15.3 19.0 14.3 10.8 1.2% 1.3% 1.6% 3.3%Whirlpool China 1,134 19.8 19.8 15.8 13.6 13.4 13.4 10.6 9.2 1.3% 1.3% 1.5% 0.0%Skyworth 1,502 6.0 5.5 6.3 5.7 5.0 6.4 5.1 4.9 5.2% 5.4% 4.9% 5.5%TCL 741 -88.2 -18.2 13.8 10.4 164.8 -105.5 15.2 11.1 1.4% 0.0% 1.9% 2.0%Average ex TCL 11.8 12.7 11.0 9.4 8.4 9.7 7.9 6.7 3.3% 3.2% 3.4% 3.7%InternationalApple 539,710 10.5 10.7 10.7 9.7 8.7 8.0 8.7 8.2 2.2% 2.0% 2.2% 2.3%Samsung 155,897 8.6 8.3 8.6 8.0 5.5 4.9 5.5 5.2 2.2% 2.0% 2.2% 2.6%Whirlpool 10,509 10.8 12.7 10.8 8.2 8.2 9.3 8.2 7.3 2.9% 2.6% 2.9% 3.0%Electrolux 6,231 13.4 32.3 13.4 11.3 9.6 12.5 9.6 8.3 3.6% 3.5% 3.6% 3.9%LG Electronics 8,240 14.5 24.9 14.5 11.9 11.4 14.7 11.4 10.4 0.8% 0.7% 0.8% 0.8%AO Smith 6,148 20.0 22.5 20.0 17.7 12.9 14.4 12.9 11.6 1.3% 1.1% 1.3% 1.5%Rinnai 4,697 23.3 28.6 24.3 22.4 13.0 15.8 13.5 12.5 0.8% 0.7% 0.7% 0.8%Average 15.1 20.0 14.6 12.8 10.1 11.4 10.0 9.1 1.9% 1.8% 2.0% 2.1%

Source: Bloomberg; Capital IQ.

Table 8: JPMf Trading Multiple Comparisons

Mkt Cap P/E EV/EBIT EV/EBIT adjusted for working capital

US$m NTM FY+1 FY+2 FY+3 NTM FY+1 FY+2 FY+3 NTM FY+1 FY+2 FY+3ChinaGree 17,136 8.4 8.0 8.4 8.0 5.1 4.9 5.1 4.6 10.1 9.7 10.1 9.1Midea 17,717 9.2 9.8 9.2 8.2 5.6 6.2 5.6 5.1 6.3 6.9 6.3 5.7Qingdao Haier 8,544 14.3 13.7 14.3 13.8 8.9 8.9 8.9 8.3 10.3 10.3 10.3 9.6Haier Electronics 4,897 13.0 13.0 13.0 11.5 6.0 6.1 6.0 5.3 6.4 6.5 6.4 5.7

Source: Bloomberg; Capital IQ.


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Earnings revisions

We change our forecasts as detailed in the table below. Key changes to our forecasts are follows:

We reduce our sales forecasts to reflect more conservative assumptions for 2H15 and FY16.

We reduce our margin assumptions slightly to reflect more conservative assumptions with respect to future margin outlook.

Table9: Haier Electronics - Changes to Estimates

RMM mn, %

Old New % Change

FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17Revenue 64,262 66,255 71,150 62,097 62,828 67,485 -3.4% -5.2% -5.2%Revenue growth -4.3% 3.1% 7.4% -7.5% 1.2% 7.4%Gross profit 9,998 10,645 11,646 9,648 9,963 10,904 -3.5% -6.4% -6.4%Gross margin 15.6% 16.1% 16.4% 15.5% 15.9% 16.2%EBIT 2,961 3,181 3,610 2,901 2,922 3,322 -2.0% -8.1% -8.0%EBIT margin 4.6% 4.8% 5.1% 4.7% 4.7% 4.9%NPAT 2,716 2,677 3,048 2,670 2,472 2,817 -1.7% -7.6% -7.6%NPAT growth 11.0% -1.5% 13.9% 9.1% -7.4% 14.0%Diluted EPS (RMBcps) 97.4 94.7 107.6 95.8 87.7 99.6 -1.6% -7.5% -7.4%DPS (HKcps) 12.0 12.0 13.0 12.0 10.0 12.0 0.0% -16.7% -7.7%

Source: J.P. Morgan estimates, Company data.

FY15 result preview

Following our earnings revisions, we now expect Haier Electronics to report FY15 sales of RMB62.1bn, declining ~8% yoy.

Following 113bps of gross margin expansion in 1H15, we expect 67bps of gross margin expansion in 2H15 and 88bps of gross margin expansion for FY15.

Following 1% decline in EBIT for 1H15, we expect 5% decline in EBIT for 2H15. We expect EBIT margins for 2H15 to expand ~30bps and expect full year EBIT margins to expand ~20bps.

We expect the company to declare final dividend of HK$0.12 per share.


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Table 10: Haier Electronics - 2H15E and FY15E J.P. Morgan Estimates

RMB mn, %

% Change YoY As % of full year

1H14 2H14 FY14 1H15E 2H15E FY15E 1H15 2H15E FY15E 1H15 2H15ERevenue 32,937 34,197 67,134 31,332 30,764 62,097 -5% -10% -8% 50% 50%Gross Profit 4,532 5,310 9,842 4,664 4,984 9,648 3% -6% -2% 48% 52%Operating Profit 1,273 1,730 3,002 1,264 1,637 2,901 -1% -5% -3% 44% 56%Net interest income 39 119 158 100 93 192 154% -22% 22% 52% 48%Share of associates and JVs 0 0 0 3 20 23 nm nm nm 11% 89%Other income 5 1 6 33 250 283 nm nm nm 12% 88%PBT 1,316 1,850 3,166 1,399 2,000 3,399 6% 8% 7% 41% 59%Tax -311 -340 -651 -269 -390 -658 -14% 15% 1% 41% 59%PAT 1,006 1,509 2,515 1,131 1,610 2,740 12% 7% 9% 41% 59%Minority interest -28 -40 -68 -34 -36 -70 20% -10% 2% 48% 52%Net income to Shareholders 978 1,469 2,447 1,097 1,573 2,670 12% 7% 9% 41% 59%

Gross Margin 13.8% 15.5% 14.7% 14.9% 16.2% 15.5% 113 bp 67 bp 88 bpOperating margin 3.9% 5.1% 4.5% 4.0% 5.3% 4.7% 17 bp 26 bp 20 bpNet Margin 3.0% 4.3% 3.6% 3.5% 5.1% 4.3% 53 bp 82 bp 66 bpTax rate 23.6% 18.4% 20.6% 19.2% 19.5% 19.4% -441 bp 111 bp -118 bp

Source: Company reports and J.P. Morgan estimates.

Quarterly growth trend

Table11: Haier Electronics - Quarterly Sales Growth Trend

Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15Washing machine 11.9% -9.4% 18.7% 4.4% -2.8% 15.7% 8.1% 0.7% 6.4% 4.1% 1.5%Water Heater 20.5% -8.5% 1.7% -16.5% 1.8% 5.9% 7.8% 1.8% 7.3% 1.1% -1.6%Integrated Channel Services 14.7% 8.9% 16.4% 13.6% 14.0% 13.7% 10.2% -4.3% 1.8% -12.5% -13.4%Total 14.5% 4.9% 15.9% 9.3% 10.1% 13.5% 9.6% -2.8% 2.8% -9.5% -9.8%

Net income (RMBm) 396.0 425.8 567.2 647.9 466.0 511.6 682.4 786.6 536.0 560.8 735.2Net income % change YoY 25.3% 7.4% 23.7% 23.6% 17.7% 20.1% 20.3% 21.4% 15.0% 9.6% 7.7%

Source: Company reports.


14



Investment Thesis, Valuation and Risks

Haier Electronics Group Co (Overweight; Price Target: HK$18.00)

Investment Thesis

Haier Electronics currently trades at a forward P/E of ~13x, with net cash accounting for ~28% of market cap. While the sales momentum has slowed, we believe multiple re-ratng catalysts remain, particularly with respect to asset acquisitions/injections, growth in smart home appliances and growth in logistics profitability. We continue to believe the current share price implies limited upside with respect to many of the company’s innovation initiatives.

Valuation

Our Dec-16 PT of HK$18 is based on a target P/E of 15x and our earnings forecasts for the year ending Dec-16. Our target P/E is at a discount to the average one-year forward P/E for Haier Electronics over the past 12 months.

Risks to Rating and Price Target

Downside risks to our view include: (1) a downturn in demand for household appliances in China; (2) increases in competitive intensity in the household appliances sector in China; (3) events that negatively impact Haier’s reputation (e.g., product safety issues); (4) changes in consumer preferences that negatively impact e-commerce penetration and hence Haier’s ICS business; (5) raw material cost increases that negatively impact Haier’s gross margins; and (6) higher-than-expected operating and capital investment in the business.


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Haier Electronics Group Co: Summary of FinancialsIncome Statement Cash flow statementRmb in millions, year end Dec FY13 FY14 FY15E FY16E FY17E Rmb in millions, year end Dec FY13 FY14 FY15E FY16E FY17E

Revenues 62,263 67,134 62,097 62,828 67,485 PBT 2,638 3,166 3,399 3,154 3,589% change Y/Y 12.0% 7.8% (7.5%) 1.2% 7.4% Depr. & amortization 122 155 231 289 346

Gross Profit 9,138 9,842 9,648 9,963 10,904 Change in working capital (84) (41) 84 (17) (44)

% change Y/Y 2.2% 7.7% (2.0%) 3.3% 9.4% Tax & Other 23 263 (4) (70) 15Gross margin 14.7% 14.7% 15.5% 15.9% 16.2% Cash flow from operations 2,161 2,911 2,821 2,741 3,201Other operating income 124 131 109 118 132

EBITDA 2,748 3,158 3,132 3,212 3,669 Capex (578) (834) (1,301) (882) (781)% change Y/Y 15.5% 14.9% (0.8%) 2.6% 14.2% Sale of assets - - - - -

EBITDA Margin 4.4% 4.7% 5.0% 5.1% 5.4% Acquisition of subsidiaries/intangibles (31) (12) 0 0 0EBIT 2,626 3,002 2,901 2,922 3,322 Other (1,046) 506 (1,633) 0 0

% change Y/Y 15.6% 14.3% (3.4%) 0.8% 13.7% Cash flow from investing (1,654) (340) (2,934) (882) (781)

EBIT Margin 4.2% 4.5% 4.7% 4.7% 4.9%Net Interest 11 158 192 191 223 Equity raised/(repaid) 165 1,211 0 0 0Share of JVs 0 0 23 41 43 Debt raised/(repaid) 97 860 153 0 0

Other non operating income - - - - - Dividends paid (180) (233) 0 (251) (224)Earnings before tax 2,638 3,166 3,399 3,154 3,589 Other 21 310 (100) 0 0% change Y/Y 17.5% 20.0% 7.4% (7.2%) 13.8% Cash flow from financing 102 2,149 53 (251) (224)

Tax (548) (651) (658) (611) (695)as % of EBT 20.8% 20.6% 19.4% 19.4% 19.4% FX gain/(loss) - - - - -

Minorities (53) (68) (70) (71) (76) Net change in cash 609 4,720 (60) 1,608 2,197Net income (reported) 2,037 2,447 2,670 2,472 2,817 Ending cash 5,977 11,545 10,870 12,478 14,674% change Y/Y 20.2% 20.1% 9.1% (7.4%) 14.0% DPS 0.08 0.09 0.09 0.08 0.09

Recurring Net Income 2,037 2,442 2,443 2,472 2,817% change Y/Y 20.2% 19.9% 0.1% 1.2% 14.0%Diluted EPS 0.78 0.90 0.96 0.88 1.00

% change Y/Y 18.1% 14.9% 7.1% (8.8%) 13.6%Recurring EPS 0.80 0.92 0.89 0.88 1.01

% change Y/Y 13.3% 14.8% (3.8%) (0.0%) 14.0%

Balance sheet Ratio Analysis

Rmb in millions, year end Dec FY13 FY14 FY15E FY16E FY17E Rmb in millions, year end Dec FY13 FY14 FY15E FY16E FY17E

Cash and cash equivalents 6,824 10,930 10,870 12,478 14,674 Gross margin 14.7% 14.7% 15.5% 15.9% 16.2%Accounts receivable 9,094 8,860 7,832 8,082 8,682 EBITDA margin 4.4% 4.7% 5.0% 5.1% 5.4%

Inventories 2,892 3,668 3,301 3,394 3,633 Operating Margin 4.2% 4.5% 4.7% 4.7% 4.9%Others 220 347 359 359 359 Net margin 3.4% 3.8% 4.0% 4.0% 4.3%

Current assets 19,030 23,805 22,363 24,313 27,349 Recurring net profit margin 3.3% 3.6% 3.9% 3.9% 4.2%

Goodwill 6 75 429 429 429 Sales growth 12.0% 7.8% (7.5%) 1.2% 7.4%Intangible assets 90 142 142 142 142 Net profit growth 20.2% 20.1% 9.1% (7.4%) 14.0%

Long term investments 3 3 1,370 1,411 1,454 Recurring net profit growth 20.2% 19.9% 0.1% 1.2% 14.0%Net fixed assets 1,797 2,335 3,762 4,354 4,789 EPS growth 18.1% 14.9% 7.1% (8.8%) 13.6%

Other assets 955 1,156 1,413 1,413 1,413Total Assets 21,881 27,515 29,477 32,061 35,575 Interest coverage (x) NM NM NM NM NM

Net debt to equity (73.8%) (75.4%) (61.2%) (62.3%) (64.9%)

Liabilities Sales/assets 3.1 2.7 2.2 2.0 2.0Short-term loans 160 0 153 153 153 Assets/equity 302.4% 257.1% 216.4% 192.8% 184.1%Trade & other payables 10,979 11,817 10,484 10,809 11,602 ROE 31.7% 26.4% 19.1% 15.9% 15.7%

Others 1,293 1,304 1,452 1,419 1,466 ROCE 28.0% 21.8% 15.9% 13.7% 13.7%Total current liabilities 12,431 13,121 12,089 12,380 13,221

Long-term debt 717 1,801 1,041 1,041 1,041Others 9 16 17 17 17Total Liabilities 13,823 15,413 13,669 13,961 14,805

Minorities 337 612 961 1,032 1,108Shareholders' equity 7,721 11,490 14,847 17,068 19,662BVPS 2.87 4.06 5.21 5.90 6.79

Source: Company reports and J.P. Morgan estimates.


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JPM Q-ProfileHaier Electronics Group Co., Ltd. (HONG KONG / Consumer Discretionary)As Of: 29-Jan-2016 [email protected]

Local Share Price Current: 13.28 12 Mth Forward EPS Current: 1.07

PE (1Yr Forward) Current: 10.5x P/E Relative to Hong Kong Index Current: 0.79

Earnings Yield (& Local Bond Yield) Current: 9.55% Dividend Yield (Trailing) Current: 0.67

ROE (Trailing) Current: 22.10 Price/Book (Value) Current: 2.4x

SummaryHaier Electronics Group Co., Ltd. 4680.98 As Of:

HONG KONG 7.211288 TICKER 1169 HK EQUITY Local Price: 13.28

Consumer Discretionary Household Durables EPS: 1.07

Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 10.47xP/BV (Trailing) 2.36x 0.47 7.98 3.77 3.56 7.15 -0.03 -80% 238% 60% 51%

Dividend Yield (Trailing) 0.67 0.00 3.56 0.00 0.27 1.53 -0.98 -100% 432% -100% -59%

ROE (Trailing) 22.10 -28.65 49.46 22.19 18.88 57.51 -19.74 -230% 124% 0% -15%

Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, JPMorgan Quantitative & Derivative Strategy

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17



Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention.

Important Disclosures

Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in Haier Electronics Group Co.

Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of Haier Electronics Group Co.

Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail [email protected].

Date Rating Share Price (HK$)

Price Target (HK$)

11-Jul-15 OW 19.28 25.00

26-Aug-15 OW 15.14 22.00

08-Oct-15 OW 15.32 20.00

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear

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Haier Electronics Group Co (1169.HK, 1169 HK) Price Chart

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OW HK$25

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage Jul 11, 2015.

mailto:[email protected]


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18



in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.

Coverage Universe: Li, Shen Wei: Anta Sports Products Ltd. (2020.HK), China Lilang Ltd. (1234.HK), Dairy Farm International Holdings Limited (DAIR.SI), Giordano (0709.HK), Gree Electric Appliances - A (000651.SZ), Haier Electronics Group Co (1169.HK), L'Occitane International SA (0973.HK), Li Ning Co Ltd (2331.HK), Midea Group Co Ltd - A (000333.SZ), Qingdao Haier Co Ltd - A (600690.SS), Sa Sa International Holdings Limited (0178.HK), Samsonite International SA (1910.HK), Sun Art Retail Group Limited (6808.HK), Trinity Limited (0891.HK), Xtep International Holdings Limited (1368.HK), Yonghui Superstores Co Ltd - A (601933.SS)

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2015

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 44% 44% 12%IB clients* 52% 47% 35%

JPMS Equity Research Coverage 45% 47% 8%IB clients* 70% 63% 50%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

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Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237). Telephone: 91-22-6157 3000, Facsimile: 91-22-6157 3990 and Website: www.jpmipl.com. For non local research reports, this material is not distributed in India by J.P. Morgan India Private Limited. Thailand: This material is issued and distributed in Thailand by JPMorgan Securities (Thailand) Ltd., which is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission and its registered address is 3rd Floor, 20 North Sathorn Road, Silom, Bangrak, Bangkok 10500. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the OJK a.k.a. BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by or through J.P. Morgan Securities Singapore Private Limited (JPMSS)[MCI (P) 100/03/2015 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. This material is provided in Singapore only to accredited investors, expert investors and institutional investors, as defined in Section 4A of the Securities and Futures Act, Cap. 289. Recipients of this document are to contact JPMSS or JPMCB Singapore in respect of any matters arising from, or in connection with, the document. Japan: JPMorgan Securities Japan Co., Ltd. and JPMorgan Chase Bank, N.A., Tokyo Branch are regulated by the Financial Services Agency in Japan. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., DubaiBranch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc. Investment research issued by JPMS plc has been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. This material does not take into account the specific investment objectives, financial situation or particular needs of the recipient. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the term "wholesale client" has the meaning given in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Limited, Seoul Branch. Singapore: As at the date of this report, JPMSS is a designated market maker for certain structured warrants listed on the Singapore Exchange where the underlying securities may be the securities discussed in this report. Arising from its role as designated market maker for such structured warrants, JPMSS may conduct hedging activities in respect of such underlying securities and hold or have an interest in such underlying securities as a result. The updated list of structured warrants for which JPMSS acts as designated market maker may be found on the website of the Singapore Exchange Limited: http://www.sgx.com.sg. In addition, JPMSS and/or its affiliates may also have an interest or holding in any of the securities discussed in this report – please see the Important Disclosures section above. For securities where the holding is 1% or greater, the holding may be found in the Important Disclosures section above. For all other securities mentioned in this report, JPMSS and/or its affiliates may have a holding of less than 1% in such securities and may trade them in ways different from those discussed in this report. Employees of JPMSS and/or its affiliates not involved in the preparation of this report may have investments in the securities (or derivatives of such securities) mentioned in this report and may trade them in ways different from those discussed in this report. Taiwan: This material is issued and distributed in Taiwan by J.P. Morgan Securities (Taiwan) Limited. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in

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any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / [email protected].

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised January 01, 2016.

Copyright 2016 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P


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