Strong execution capability; initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Consumer Retail / Wholesale Trade Company Midea Date 8 October 2015 Initiation of Coverage Strong execution capability; initiating with Buy Reuters Bloomberg Exchange Ticker 000333.SZ 000333 CH SHZ 000333 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 120,655.2 141,501.4 148,735.5 165,314.9 184,888.8 Reported NPAT (CNYm) 5,317.5 10,502.2 11,253.6 13,006.7 14,975.1 DB EPS FD(CNY) 1.73 2.49 2.59 2.98 3.42 PER (x) 10.2 7.7 9.7 8.5 7.4 Yield (net) (%) 4.5 4.2 3.5 4.0 4.6 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 Three-year strategy to become industry leader; initiating with 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) 124/04/2015. Price at 30 Sep 2015 (CNY) 25.23 Price target - 12mth (CNY) 34.79 52-week range (CNY) 40.58 - 19.04 Shenzhen Index 1,795 Richard Huang, CFA Research Analyst (+852) 2203 6202 richard.rui-huang@db.com Anne Ling Research Analyst (+852) 2203 6177 anne.ling@db.com Price/price relative 102030405010/134/1410/144/15MideaShenzhen Index (Rebased) Performance (%) 1m 3m 12m Absolute -12.4 -32.3 30.3 Shenzhen Index -4.1 -30.3 28.9 Source: Deutsche Bank Into its 2nd three year plan (2015-18), management targets to become the industry leader in air conditioners, refrigerators, and washing machines through products mix and innovations. Midea has achieved early signs of its market leader with superior sales growth 17-18% yoy in 2013-14. We expect this outperformance to continue in 2016-18. We expect by 2018 its share in air conditioners, refrigerators, and washing machines to reach 26/10/25% and increase by 2/2/4 ppt from 2014. As such, we estimate a NP CAGR of 15% on a sales CAGR of 11% over 2016-18. We initiate with a Buy with a TP of RMB34.79. Growth due to improvements in product innovation and channel expansion We expect small appliances to grow at a 14% CAGR during 2016-18, to RMB53bn by 2018 (26% of total sales). This is mainly driven by expansion of sales channels, including the online channel, and new product launches. We expect e-commerce sales to grow at a 25% CAGR during 2016-18 to RMB31bn by 2018, or 15% of its sales revenue. It is the top white goods brand in the online channel with online sales rising 78% yoy to RMB7bn in 1H15, or 9% of total sales revenue. We expect air conditioner sales to grow at 10% to RMB96bn by 2018 or 47% of total sales. Focus on shareholder return by a well-motivated management team We expect the management team to focus on shareholder return and to develop the business under a stable dividend payment and share buyback plan. Midea has decentralized its management structure to suit the management of the wide range of product portfolio, led by a professional management team with strong execution capability. The management team has a combined 11% stake in the company and it is well motivated by the employee stock option scheme and business partner scheme. Our target price of RMB34.79 offers 38% upside potential; risks We expect Midea to report a 15% net profit CAGR in FY16-18 on 11% growth in sales revenue. Our primary valuation methodology is DCF, employing a COE of 9.5%, beta of 1 and terminal growth rate of 2%. This produces a fair value estimate of RMB34.79/share, implying FY15/16E PE of 13x/12x. Company risks include overseas expansion risks. 8 October 2015 Retail / Wholesale Trade Midea Page 2 Deutsche Bank AG/Hong Kong Model updated:01 October 2015 Running the numbers Asia China Retail / Wholesale Trade Midea Reuters: 000333.SZ Bloomberg: 000333 CH Buy Price (30 Sep 15) CNY 25.23 Target Price CNY 34.79 52 Week range CNY 19.04 - 40.58 Market Cap (m) CNYm 107,624 USDm 16,933 Company Profile Midea is mainly engaged in the manufacture and sale of household electronics. The Company's products include household air conditioners, central air conditioners, refrigerators, washing machines, and small home appliances. Price Performa