Zhuhai Yinlong has decided to terminate this deal. Gree announced on 16 November that it will not proceed with its acquisition ofZhuhai Yinlong, as a result of: 1) the revised proposal not being approved bythe shareholders of Zhuhai Yinlong, and 2) Zhuhai Yinlong therefore decidingto terminate the deal. According to the announcement, the company’sbusiness is in good shape, and the termination of the deal will not have anynegative impact on the company’s development strategy and daily operations. The company plans to seek new growth drivers to improve its profitability andenhance its competitiveness. Separately, the company said it will not topropose any M&A plan for at least one month from now. Resume trading from 17 November. The company’s shares will resume trading from 17 November. Overhang lifted, reiterating Buy. We are positive on the cancelation of the deal, which is in line with ourexpectations, as highlighted in our note “Revision of acquisition proposal,continuing suspension by 30 Nov” published on 7 November. We believe the company can now focus on its main business with less riskfrom the business diversification. In addition, the company should learnlessons from this deal, and take total shareholders’ return seriously, especiallythe interests of the minority shareholders. We maintain our Buy recommendation on the back of Gree’s dominantposition in the air conditioner industry and strong balance sheet, with a decentdividend yield. The company had net cash of RMB87bn as of 9M16, or 64% ofits market cap. The company’s share was trading at 9.3x FY16 PE, which is 20% discount ofthe average PE multiple of Qingdao Haier (11.2x FY16 PE) and Midea’s (11.9xFY16 PE), according to Bloomberg Finance LP.

Ms. Dong has resigned from Gree Group (parent company of Gree) Local press (Sohu finance) has reported that Ms. Dong e, chairlady of Gree(listed company) and Gree Group (parent company), has resigned as chairladyof Gree Group, effective 18 October. Ms. Dong will continue to act as chairlady and president of Gree The company’s IR team confirmed this news in an email response, andresponded that Ms. Dong would continue to act as chairlady and president ofGree. The reason for Ms. Dong’s resignation as chairlady of Gree group wasthat 1) Ms. Dong could avoid conflicts of interest in the ESOP (employee stockownership programme), as she was taking positions in different SOEcompanies, and 2) she could focus on the development of Gree. Deutsche Bank comments We believe Ms. Dong will continue to serve as the chairlady of Gree and thatthis resignation in the parent company will not affect Ms. Dong’s service in thelisted company. However, Gree has been criticised as lacking with regard toleadership succession. We believe the company has realised this concern, andwill strengthen its leadership team to ensure the business continuity. The company’s shares are suspended, pending the revision of the acquisitionproposal.

Deutsche Bank comments We believe there are several scenarios when revising the acquisition proposal. They are: 1) the acquisition and the private placement are cancelled, 2) theprivate placement is canceled, while the issue price of the acquisition isrevised up by 44% to RMB22.4, the closing price of the recent trade day (28Oct), and 3) the issue price for the acquisition and the private placement isrevised to RMB22.4 with other terms unchanged. We believe the dilution islikely to narrow to 0%/2.9%/8.8% in the above three scenarios, vs. 14.3%dilution in the last version’s acquisition proposal. The revision of the proposal is positive to the company’s corporate governancein the long term, in our view. Management should learn lessons from thisSGM, and take the total shareholder return seriously, especially the interests ofthe minority shareholders.

3Q16 core NP in line with Deutsche Bank estimates. 3Q16 core net profit (excluding GEA) grew 13% yoy, on a 2.4% yoy increase inrevenue. This was in line with our estimates of 13%/3% yoy growth for thebottom line/top line on a like-for-like basis. Consolidated net profit declined by41% yoy to RMB508m in 3Q16, owing mainly to the deal-related one-offexpense of RMB200-300m booked in the period. Strong earnings growth of GEA. GEA’s performance was in line with our expectations, with top-line growth of2.9% yoy and double-digit EBITDA growth on a margin improvement in 9M16. For 3Q, we believe GEA’s revenue was RMB11bn, or 26% of our full-yearforecast. 3Q16 highlights. Revenue for the white goods business increased by 10% yoy, driven by thecompany’s transformation in the domestic retail market and its continuouspenetration into the global market. The GPM improved by 2.4ppts, to 29.3%, driven mainly by refrigerators, airconditioners, washing machines and kitchen appliances. The opex ratio increased by 4 ppts, to 26.2%. Net debt was RMB12bn as of 9M16, vs. net cash of RMB23bn, due to theborrowing of USD3.3bn for the acquisition of GEA. Operating cash flow was RMB 4.9bn in 9M16, four times that in 9M15. The company sold 0.7m units of customer-designed products and 2.7munits of smart appliance products in 9M16. The registered U+ APP usersreached 21m. Qingdao has built up a global-sourcing R&D and supply-chain platform,teaming up with GEA, to strengthen its operational capability in overseasmarkets. Conference call scheduled at 16:30 HKT on 31 October, +852-2112-1444/ID1807131.

Strong results in 3Q16; largely in line with DBeYonghui announced that net profit rose 107% yoy to RMB146m on an 18%increase in revenue to RMB12bn. 3Q sales were 25% of our FY16 full yearforecast, vs. 25% in 3Q14/15. 3Q NP was 13% of our FY16 full year forecast,vs.12-23% in 3Q14-15. For 9M16, net profit increased by 37% to RMB815m ona 17% increase in revenue. Maintaining Buy on rapid store expansion and improved operating efficiencyWe believe the strong results are attributable to store expansion of 21 newstores, GP margin improvement on better assortment management, andoperating leverage on economies of scale. We maintain Buy on Yonghui for itsrapid store expansion (60-80 new stores each year) and improved operatingefficiency. We keep our estimates unchanged for full year 2016.

Key takeaways from conference call post 1H16 results July and August saw positive growth for air conditioners (+20-30% yoy) andrefrigerators. To launch new products in Jul-Aug. It plans to launch new products targetingthe mid-low end product segments (RMB3-5k for frond load washers, RMB1.2-1.8k for top load washers) to enrich its product offering at all price points. Enhance marketing strategy. It plans to increase the communication withconsumers on the product features, including the product quality, advancedtechnology and the product innovative design. Strengthen channel management. It has initiated the adjustment of itsdistribution channels with a focus on the 58 key distributors and plans to rollover to 2,800 distributors nationwide. It will increase the offering of marketingresources, stabilize distributor network, protect distributors’ profitability andenhance consumers’ shopping experience. The next step is to adjust the keyaccount channels. For the online channel, it has changed eHaier mall as amarketplace to enrich the SKUs. Completion of destocking of air conditioners. Channel inventory has returnedto the normal level. Its product strategy is to focus on mid-high end segment. In 1H, ASP increased 2.9% yoy vs. the industry average of 0.9%. It expects airconditioners to increase significantly in 2H on a low base. To improve Casarte in 2H. Revenue declined in 1H. By product, fridges andkitchen appliances increased, while air conditioners and washers (due to delayin the launch of new products) declined. It expects Casarte to perform better in2H, driven by the improvement in the retail end operations. 2H16 outlook – recovery from 1H We expect air conditioners to recover to +13%, washers to slightly improve to+3%, fridges to narrow the decline to -1% and kitchenware to maintain themomentum at +9% yoy in 2H. We expect GEA to contribute RMB22bn in 2H,driven by 6% growth in LCY for the top line. We expect NP to grow 26% yoy toRMB5bn in 2016, driven by the consolidation of GEA and the recovery of AC. TP unchanged at RMB12.7; risks We fine-tune our FY16-17E by +0.1/0.4% to reflect the 1H16 results. Ourprimary valuation methodology is DCF. We thus use the blended weightedaverageCOE of 8.5%, and a long-term growth rate of 1.5%. Our DCF-basedtarget price is RMB12.7. This translates into 14/12x FY16/17E P/E, which is inline with its historical PE multiple. Downside risks: 1) failure to integrate theacquired business and 2) unfavorable FX.

Air conditioners recovering in 2H16; upgrading to Buy. Air conditioners (AC) to recover in 2H with a healthy channel inventory level We are turning more positive on Gree, as its: 1) core air conditioner business is set to recover from 3% decline in 1H16 to 15% growth in 2H16 as the channel inventory issue is now resolved; 2) foray into a rapid growth business (electric vehicles), with the stock ownership scheme and net profit guarantee clause, which should partially ease market concerns about the private placement; and 3) focus on shareholder returns with a newly committed dividend payout ratio of 60% for FY17-18, above our projection (50-55%). We lift our sales/NP by 4- 7%/14-21% for FY17-18E to reflect the recovering of AC and the consolidation of Yinlong. Our new TP of RMB24.91 implies 41% upside. Upgrading to Buy. Air conditioners (AC) to recover in 2H with a healthy channel inventory level. According to our proprietary channel check, Gree’s channel inventory had fallen to a healthy level of one to two months as of end-July. This is attributable to decisive output constraints since 2Q15 and robust market demand due to the hot weather and home improvements. Distributors should rebuild their inventories in August. We expect AC business NP to grow at a 13% CAGR in FY17-18E on a 12% CAGR in revenue. Placement amount cut to RMB9.7bn (14.3% dilution) from RMB10bn (14.5%). We believe the market’s concerns about the potential dilution (14.3% in FY17E) from issuing new shares and diversifying into non-related business have eased due to: 1) the deal being relatively small (6% of Gree’s NP in FY17E); 2) a stock ownership scheme to help align management’s interests with shareholders’ and retain talent; and 3) an NP guarantee clause to motivate the target’s management team. This deal might not be perfect for Gree’s diversification strategy; however, we believe this should be a good start for Gree to enter the electric vehicle industry, given the rapid industry growth profile (Deutsche Bank estimate: 28% CAGR in 2015-20) and favorable government policies. Raising target price to RMB24.91 from RMB18.1; risks. We use SOTP to value the company with a new target price of RMB24.91 (old RMB18.1), to reflect the de-stocking of channel inventory, the newly acquired new energy bus business, and potential dilution. Our target price implies 11x/9x FY17/18 PE, which is at a premium to its historical valuation point during de-stocking of channel inventory, and dividend yield at 5.5% for FY17E. Downside risks include competition, subsidy policy, and M&A.

1H16results ahead of DBe 1H16NP rose 21% yoy to RMB3.3bn, on a 3% increase in revenue. NP was10% higher than our expectation, mainly due to the consolidation of HaierSingapore and the better-than-expected GPM. By segment, air conditioners declined 8% yoy to RMB9.5bn, refrigeratorsdeclined by 5% to RMB14bn, washing machines increased slightly by 2% yoyto RMB8bn. Equipment increased by 9%, while integrated channel servicesdeclined 11% due to the air conditioner output volume constraint in 1H and thedownsize of third-party brand distribution . GP margin improved by 1.7ppts to 28.9%, attributable to the low raw materialand the improved product mix with high-end products. ASP for air conditioners and refrigerators rose by 3%/8% respectively. Sales offront-load washers and multi-door fridges increased by 13%/51%, respectively. e-commerce revenue rose 30% yoy, driven by promotional events with majoronline platforms. GEA – EBITDA to grow at 10%+ yoy in LCY in 2016-17 GEA grew EBITDA at a double-digit rate to USD307m in 1H16in LCY, on 3.6%yoy growth in the top line, to USD3.1bn. Haier expects GEA EBITDA to grow at10%+ yoy in LCY in 2016-17, with top-line growth of 3-5% driven by the jointprocurement, sharing resources and build up of R&D platforms. GEA wasconsolidated on 7July, which contributed RMB103m in NP and RMB3.5bn inrevenue (3% and 7% of Haier’s NP/revenue) in 1H16.

Earnings growth on expansion and improved efficiency; maintaining Buy Yonghui delivered solid results in 1H16. Store expansion is progressing asguided, with a resilient SSSg at 3% yoy in 1H16. Fresh food and grocery hasrecovered to high-teen-to-20% growth after the organizational restructure in2H15. Operating efficiency has improved, mainly driven by the efforts in: 1)direct sourcing, 2) optimization of the SKU mix, and 3) OEM and private labelproducts. We expect earnings growth at a 41% CAGR in 2016-18E, best-inclassbusiness operations in fresh food and its cash-wealth to accelerate theindustry consolidation. Maintaining Buy. 1H16: EBIT up 43% and core NP up 40%, despite macro headwind 1H16results were in line with our estimates. Core NP (excluding investmentgain and revaluation) grew 40% to RMB661m on an 18% rise in sales toRMB24.5bn. 2Q16core NP/Sales were up by 40%/22%. Core EBIT increasedby 80% yoy in 2Q on a low base last year and stringent cost control in opex.Cash generation was strong with operating cash flow of RMB1.2bn. Modest earnings revisions – lower FY2016-18E NP by 1-5% We lower our forecasts by 1-5% for 2016-18E, mainly due to the transitioningof its apparel (4% of total revenue in 1H16). We expect apparel to recover in2017, after it adopts a partnership program and with the new store layout in2H16. We also factor in the increase of interest income from the placementproceeds of RMB6.4bn in August. We expect NP to grow at 41% in 2016-18E,driven by store network expansion (15% CAGR in 2016-18E), resilient SSSg (2-4%) and the improved supply chain management. Lowering target price to RMB5.7from RMB5.8; risks Our primary valuation methodology is DCF, employing COE of 9.5%, a beta of1.0and a TGR of 1.5%. This produces a fair value of RMB5.7/share (old: RMB5.8), implying 44x/38x FY16/17E PE or 39/31x FY16/17E PE, excluding netcash (RMB11bn). This is justified given the 59x/49x PE of A-share retailers’average PE multiple (Figure 2). Key catalysts include new APP to launch in 2Hfor O2O initiatives, and acquisition deals. Key risks: competition from on/offlineplayers, weak SSS, and management capability in nationwide expansion.

To benefit from global presence and robust US home improvement industry. Haier has become a truly global home appliance company, with 45% of itsrevenue coming from the overseas market in 2017E, including 33% from theGEA business in the US. We believe the acquisition of GEA is a key milestonefor Haier to extend its global presence and build up its multi-brand equity tocater to consumers in different markets. This is consistent with Haier’s globalstrategy. We believe Haier will benefit from 1) the robust US homeimprovement industry and strong demand from other overseas countries, 2)favorable FX (USDCNY), and 3) synergies with GEA on revenue and costsavings. Haier is our top pick in the consumer sector and we reiterate Buy. Lifting earnings by 23-24% for FY17-18E, mainly on consolidation of GEA. The GEA deal was completed on 6 June and we have, therefore, incorporatedit into our model. We estimate GEA revenue growth in mid-single digits onconstant currency for FY16-18E, with a 0-6% FX tailwind (neutral currencyapproach). The key home appliance retailers in the US are positive on industrygrowth, supported by home price appreciation and an increase in hometurnover. We also note US consumers’ intentions to purchase big ticket itemssuch as homes, cars and appliances. We believe GEA should outperform theindustry growth given its leading market position and superior brand equity inthe market. We lift our earnings by 23-24% for FY17-18E to factor in GEA. 1H16: domestic market share maintained; strong revenue growth overseas. Interim results are due to be released on 31 August. We expect net profit up13% yoy to RMB3bn on a 5% increase in sales revenue. We forecast recurringNP up slightly by 2% yoy to RMB2.5bn. Haier has maintained its domesticmarket share in washing machine and refrigerator, while it has gained 1.2pptsshare ytd in air conditioner, despite a double-digit revenue decline due to anindustry issue. Overseas has seen resilient revenue growth (mid-teens) in LCY. Valuation and risks. We lift our DCF-based target price by 25% to RMB12.7 (old: RMB10.16) toreflect the 23-24% earnings contributed in FY17-18E from the consolidation ofGEA. Our target price translates into 14x/12x FY16E/17E P/E. Downside risks:1) failure to integrate the acquired business and 2) unfavorable FX (see page 3).

Target price adjusted to RMB5.80 on scrip dividend Yonghui Superstores implemented its dividend payout for 2015 on 3 June 2016with cash dividend of RMB0.15 and scrip dividend of one bonus share forevery one existing share. Total shares outstanding will increase from4,067.5mn to 8,135mn. Accordingly, we revise our target price fromRMB11.60 to RMB5.80 to reflect the share capital adjustment. Valuation remains unchanged; maintaining Buy Our target price is derived from DCF, employing 9.5% COE, a 1.0 beta and a2.5% TGR. It is equivalent to 36x FY17E P/E, unchanged from our previousvaluation. We have a Buy rating on the stock, as 1) we believe Yonghui should be a longtermbeneficiary of China’s secular trends of modern trade retailing, and 2) itowns industry-leading expertise in fresh food operations, driven by its strongsourcing capability, well-established supply chain management and optimizedbusiness procedures. We estimate 41% net profit growth for FY16-18, on 20%revenue growth, driven mainly by 60-80 new store additions each year, 2-3%SSSg and operation leverage. Key downside risks: keen competition, low CPI and challenges in nationwideexpansion.

Management of Shanghai Oriental Pearl attended our Access Asia conference;the following are the key highlights. IPTV’s growth potentials resume. Management explained that there hasbeen a change in strategy in 2016. Originally, it has been industryconsensus that IPTV’s size will shrink and thus its focus in 2015 has beenon developing internet TV and other businesses while managementexpects IPTV to shrink. However, it noticed that it still has potential andthus it continues to grow this business. In 1Q2016, IPTV’s ARPU especiallyfor the value-added business continued to grow. Investing in content – leveraging assets from its parent company andDragon TV. In 2016, it will increase its content investment. However,management noticed that instead of buying content copyright, it shouldincrease its content production like drama, entertainment and varietyshows. In its restructuring, it has a movie and content production company.In addition, it can leverage on SMG and Dragon TV’s resources andengage in co-production of content. Business plan to cater for new regulatory environment – more to sharewith investors in 2H16. With the Regulation No. 6 released on early May,management explained that it touched on 3 areas namely contentproviders, distributors and platform players. It believes the IPTVdevelopment has more clarity than others. Thus, it will continue to workwith China Telecom and explore opportunity with China Unicom and, inthe future, China Mobile (when they receive an IPTV license). As forinternet TV and mobile TV segments, management is still evaluating thechanges required by new regulations. With new management on board,management will share further details with investors about its businessplan in 2H2016.

TP adjusted to RMB22.18 Midea announced on 29 April that it will distribute scrip dividend (5 for 10) andcash dividend (RMB1.2/share) for 2015. Accordingly, we change our TP fromRMB33.25 to RMB22.18 to reflect the share capital adjustment. The exdividendday is 5 May, and the first day of the dealing in the new share is 6May. Zhuhai Rongrui places 94m shares through block trade Midea announced on 7 May that Zhuhai Rongrui, a subsidiary of ICBCInternational, has reduced 94m shares through block trade during April-May. After the share placement, Zhuhai Rongrui reduced its stake from 7.14% to4.94% in Midea. We believe the share placement will relieve the PE investor’soverhang. To recap, Zhuhai Rongrui acquired 12% stake in Midea forRMB64bn in November 2011. The lock-up period for the PE investors (ZhuhaiRongrui) was one year after the IPO date (September 2013) of Midea. Valuation and risks Our TP is derived from DCF, factoring in 9.5% WACC and 2% TG, in line withour assumptions for Chinese consumer stocks. It is equivalent to 10x/10xFY16/17 PE. We have a Buy rating on the stock. Key downside risks: irrationalglobal expansion could incur unnecessary risk, slower-than-expecteddestocking of AC, unfavorable weather and intense competition.

Long-term thesis intact despite heavier near-term expenditures Heavier investments to support more aggressive internet TV user target After recent interviews with management and experts, we now expect Oriental Pearl to become more aggressive in acquiring internet TV users. We agree with management’s strategy to enhance the internet TV market share to better leverage the industry’s growth potential. Nevertheless, the more aggressive user acquisitions will likely lead to heavier expenditure, especially on content investment and subsidy programs. We thus reduced 16E/17E recurring product by 9.9%/6.9% and the DCF-based target price to CNY36. Heavier investments to support more aggressive internet TV user target Oriental Pearl (OP) indicated its target to achieve 25mn active internet TV users in 2016. This is higher than the company’s original guidance of 20m and our previous forecast of 17.5m. To achieve such we expect OP to (1) increase content investment: we now expect OP to invest RMB4.5bn in content in 16E- 18E (vs. RMB3.9bn previously). Due to the fast amortization schedule, we expect such to affect OP’s gross margin; (2) accelerate the OTT box subsidy program; and (3) increase marketing. We cut 16E/17E recurring earnings by 9.9%/6.9%, respectively, to reflect aforementioned expenditures (Figure 5). Good long-term value; TV shopping, tourism and advertisement steady Despite the heavier expenditure required in the near-term, we continue to like OP for its unique resources. These include (1) both B2C and B2B2C channels to grow internet TV users, (2) a stable IPTV business to deliver leverage against fixed costs (mainly content amortization), (3) healthy growth in TV shopping, tourism and advertisement businesses and (4) strong legal compliances. The recent round of regulation tightening (Figure 9) should enhance OP’s competitive advantage, in our view. DCF TP of CNY36; SoTP analysis suggests potential not fully discounted; risks We value OP based on DCF methodology as we expect investors to focus on OP’s long-term monetization of business resources. We derive a WACC of 9.6%, with a cost of equity of 10.1% (risk-free rate = 3.9%, beta = 1.12, market risk premium = 5.6%) and cost of debt (after tax) of 4.5%. Our SoTP analysis suggests the market does not fully price in OP’s business potential. Downside risks: weaker user acquisition & ARPU of internet TV, more severe content price inflation, slower property monetization and regulatory loosening.

1Q16 EBIT and sales in line with our expectations. Midea reported strong 1Q16 results on 29 April after the market closed. Netprofit rose 17% yoy to RMB3.9bn on the back of a 9% decline in sales revenueto RMB39bn. 1Q16 EBIT and sales are 33%/26% of our full-year forecasts, vs. 32%/26-27% in 1Q114/15. The strong earnings were mainly driven by a GPmargin improvement. Key highlights of 1Q16 results. Sales declined 9% yoy to RMB38.6bn. Sales volume of air conditionersdeclined 25% yoy, while sales volume of refrigerators and washing machinesrose 17% and 16% yoy, respectively, according to China IOL. We believe ASPfor air conditioners improved slightly in 1Q16. According to management,installation cards for air conditioners increased 10% yoy in 1Q16. GP margin improved 3.1ppts to 29.9%, mainly driven by 1) product mixchanges to more high-end products, 2) lower raw material costs and 3)improvement in overall ASP. Opex ratio increased 0.8ppts to 17.2%. EBIT grew 12% yoy to RMB4.6bn, with EBIT margin increasing 2.3ppts to 12%. Inventory decreased 10% yoy to RMB10bn, attributable to improved ordermanagement as the company had adopted a make-to-order distribution model(i.e. T+3 order management system) for washing machines. Please refer to ournote, “Key takeaways from Midea's Investor Day on 27 April”, published on 28April for details on the T+3 system. Cash flow rose 164% yoy to RMB6.6bn, mainly due to decreased accountsreceivable. 2016 outlook. We believe management is decisive in de-stocking channel inventory for airconditioners, as it guided during the Investor Day on 27 April. We believe thisshould benefit Midea in the long run as it should: 1) enable the company toflexibly adjust production and R&D to address evolving and personalized enduserdemand; 2) improve operating efficiency by reducing inventory in both thefactories and distribution channels; and 3) optimize the supply chain byflattening the distribution channel. For 2016, we expect air conditioner sales revenue to slightly increase 4% yoy,driven by 1) recovering market demand, with installation cards increasing 10%yoy in 1Q16, 2) ASP gradually improving, and 3) a low base in 2H15.