Haier’s 3Q22 revenue and reported NP were up by 8.6%/20.3% YoY, which seems not too bad. However, we believe the market is concerned about the adjusted NP (+11% YoY by our est.) if excluding a one-off finance income of RMB650m. Also, sale growth of Casarte branded products also tapered in 3Q22 due to sporadic outbreaks of COVID-19.
　　Despite this, we believe 3Q22 earnings reflected the all-rounded outperformance of Haier in the industry. We believe the story of Haier’s margin expansion would remain intact despite all the challenges. We continue to see Haier as the top pick in the sector. Reiterate BUY.
　　Key Factors for Rating
　　3Q22 core NP slightly missed. In 3Q22, Haier’s 3Q22 revenue and reported NP were up by 8.6%/20.3% YoY to RMB62.9bn/RMB3.72bn, respectively.
　　However, Haier recorded an RMB650m gain in its non-interest finance income, which we believe to be FX gain (due to its overseas exposure). If excluding this, NP would only be up by 11% YoY in 3Q22, slightly moderate when compared to the growth in 2Q22 (+17%), and the number is also below the full-year NP growth target of 15%, which may concern investors.
　　China sales affected by COVID-19 outbreaks. In China, Haier’s sales were up by 8.8% YoY, a similar trend as 2Q22. However, sales growth of high-end Casarte branded products tapered to low-teens in 3Q22 (1H:+21% YoY). Its sales were dragged by sporadic COVID-19 cases nationwide, particularly in September 2022 as growth further slowed down to high single-digit. Still, this is a strong outperformance when compared to the industry, and mgt. targets the growth to reaccelerate to double digits in 4Q22.
　　Overseas so far not bad. Haier achieved 9% revenue growth in overseas market in 3Q22, which should also outperform its peers. Notably, it achieved rather strong sales in Europe, as high-end products sales were up >40% YoY in the region. This could attribute to Haier’s strong R&D capability which allows highly energy-efficient products (such as products using air source heat pumps) to be launched.
　　Still positive on margins expansion. Mgt. remains confident on lifting the margins in the next 1-2 years, as Haier has been pushing for a radical digitalisation and self-production of parts. Meanwhile, mgt. expects that falling prices of commodities should start to reflect on the COGS in 4Q22, +ve to GPM.
　　Valuation
　　We remain positive and maintain our BUY rating on Haier despite the challenging environment, as suggested by its relative strong sales performance.
　　Our latest TP is lowered to HK$31.7, based on 15x 2023 P/E (previous: 16x) which corresponds to 1x PEG, and a HKD/CNY rate of 0.93 (previous: 0.87).
　　Key Risks for Rating
　　Higher-than-expected raw material cost and freight cost, weaker property market in China and the US, unexpected trade tension between China and international markets, and keen competition in the home appliance market.