While Haier’s 4Q23 earnings were in line with our expectations and defied pessimism of investors, it is pleased to see Haier lifted its dividend payout ratio to 45% as well. Haier’s commitment to enhance shareholders’ return, with a gradual increase of payout ratio in the future, reflects the success of Haier’s recent reforms. This is also evidenced by accelerated performance in air conditioners and European markets, which will translate into better margins. Hence, we continue to view Haier as a quality bargain, and we expect its valuation will also be supported by favourable policies, such as the subsidies that promote recycling of home appliances in China.
　　Key Factors for Rating
　　4Q23 in line with improving operating performance. Haier’s 4Q23 revenue was up 6.8% YoY to RMB62.8bn, a slight QoQ acceleration versus 3Q23. NP grew by 13% YoY to RMB3.47bn, thanks to favourable tax rate offsetting higher finance expenses. Hence, for the full year of 2023, NP was up 13% YoY, in line with our expectations. The full year results also demonstrated that despite only mild improvement in GPM under IFRS (30.9% in 2023, +0.3ppt YoY), Haier’s operating efficiency has improved significantly, as OPM rose 0.6ppt to 7.7% in 2023.
　　Lifting dividend payout ratio both a ST & LT positive. The final dividend announced by Haier of RMB0.804/share implies 45% payout ratio, higher than 2022/23 of 32.6%/35.8%. Haier intents to lift the payout ratio gradually and so in 2026, it will likely be higher than 50%. We believe this is a rather strong positive signal, reflecting Haier’s confidence in enhancing shareholders’ return through continuously improving free cash flow.
　　China: contribution from air-conditioners to accelerate. Sales in China grew 7.1% YoY in 2023, despite the weak property market. A key driver is the improving performance of AC as Haier revamped the segment. Mgt. expected sales will further improve in 2024, along with better margins. We believe this could be achievable given: (1) a 10-15% YoY revenue growth target for Casarte brand, which will launch new AC products in 2024; (2) increasing production by in-house parts, and (3) supportive policies by the central government offering subsidies for home appliance recycling.
　　Overseas: Europe shines most. Haier achieved 7.6% revenue growth in 2023, supported by Europe (+24% YoY, accounting for 11% of 2023 revenue). Mgt. expected the performance of Europe to further improve in 2024, with a new local management team and an overhaul of overseas business. This will also help lift the OPM of overseas segment to >7% in next 2-3 years.
　　Key Risks for Rating
　　Higher-than-expected raw material cost and freight cost, weaker property markets in China and the US, unexpected trade tension between China and international markets, and keen competition in the home appliance market.
　　Valuation
　　We lift our 2024/25 EPS forecasts by 7%/6% to reflect better-than-expected margins in both China and overseas, which was supported by Haier’s dedication to reform internally, including digitalisation and integration of the business functions based in Qingdao HQ and other regional markets outside China .
　　Reiterate BUY for undemanding valuation, improving dividend yield, and a proven track record of ongoing margin expansion that supports earnings growth. Our TP is adjusted to HK$30.6, based on 13.5x 2024E P/E (unchanged).