Gree:Comments from Chairman Dong
The automation reform and diversification strategy are bearing fruits.
In her speech, Ms. Dong commented that Gree began to diversifyits businesses in recent years. In addition air-conditioning business, ithas entered into the field of small appliances, smart manufacturing,smart phones etc. Gree is undergoing automation reform. The companyconsidered using the domestic equipment before, but it finally chose theimported German devices due to the higher precision. But as a long termplan, Gree decided to enter into the field of industrial manufacturing in2013. Currently, Gree’s CNC machine, and robots are not only providedfor internal use, but also for other industries. Ms. Dong said that all ofthe devices in Zhuhai Silver Dargon (a company invested by Ms Dongprivately) were produced by Gree.
Preview of 2017 results. According to Ms. Dong, Gree ‘s 2017-ytdrevenue increased RMB 40bn (2016 revenue: RMB108.3bn) as comparedwith last year’s same period, and its NP margin was 15%.
With 2017 sales increased by RMB40bn, this implies 2017 total gross revenuewill reach RMB148bn, which beat DB's forecast and market consensus by 5%and 4%, respectively. As for NP margin, her guidance is 0.3/0.8 ppt higher thanDB's forecast (14.7%) and market consensus (14.2%), respectively. Managementdid not comment on Ms Dong's 2017 sales and NPM data.
Better product mix: an important positive in 2018 restocking that is not fullypriced in. Gree’s strong net margin could be driven by better product mix.
In our recent channel checks we noticed that distributors (starting from thenew air conditioner year) are focusing more on improving their product mixthan in previous years, clearing inventory to recover cash. This may drive betterprofitability for air conditioner brands (on top of strong volume growth which islikely in the price). Profitability expansion should be universal, as Midea previouslyindicated that its core brand gross margin has improved by 2-3ppt YoY during 3Q17 analyst meeting. In our model, we expect GPM for 4Q17F to reach 32.3%for Gree vs 3Q17's 30.9% and 4Q16's 29.4%.