What’s new – Hisense-Kelon (HSK)’s share price dropped by >5% today on news reports that the SFC is seeking a High Court injunction to prevent GD Kelon’s ex-Chairman, Mr. Gu Chujun, selling 107mn shares (~8% of total issued shares) in HSK and requires Mr. Gu to repay the shareholders of Greencool (delisted from HKEx in 2007). Mr. Gu has had no connection with HSK since the company was acquired and restructured by Hisense Group in Dec 2006 (for more details of the background of HSK, please see pg. 10 of Initiate at Buy: A Cool Urbanization -led Margin Story). There should be no impac t on HSK’s fundamentals and financial s given the SFC target is solely Mr. Gu. We see the current valuation of 6.1x 2014 PER and 4.9x 2015 PER as undemanding.
GD Kelon’s ex-chairman has no connection to HSK – Mr. Gu was the founder of Greencool, which was a major shareholder of GD Kelon. He was arrested and sentenced to ten years in prison in China for embezzlement a nd false accounting in relation to GD Kelon in 2005. Since the acquisition by Hisense Group, the company’s name has been changed to Hisense -Kelo n and it underwent a series of restructuring s (i.e. asset injection s and share options scheme s) to turn around the white goods manufacturing business. HSK received Rmb310mn from the Foshan Intermediate Court on 27 Aug 2013, together with the Rmb75.8m that Hisense Yangzhou refrigerator received from the Yangzhou Intermediate Court on 13 Jun 2013 on its lawsuit against Greencool.
Recent update – Air-con (AC) sales growth continues to be robust at ~30% during April to May on current lower penetration in China, while refrigerator sales growth remains relatively muted. We expect the strong AC sales trend to continue stepping into 3Q14 , given the traditional peak season in Jul-Aug. Mgt expects refrigerator sales should rebound slightly in 2H14. Margin expansions f or both AC and refrigerator products remain on track on a product mix upgrade. We expect AC margins to improve by 1.2ppt to 23.5% and refrigerator margins to improve by 0.9ppt to 24.5% in 2014.