Midea has become the second-largest shareholder of KUKA According to KUKA’s (KU2G.D, Sell) press release, Midea has increased itsstake to 10.22% from 5.43% in KUKA as of 3 February 2016. Midea thus hasbecome the second-largest shareholder of KUKA. KUKA, headquartered inAugsburg, is one of the world’s leading suppliers of robotics, automation andsystems engineering. Deutsche Bank’s comments We believe this is consistent with Midea’s strategy to develop the robotsmanufacturing as a new business. We talked with management that itsintention is to have further cooperation with KUKA in R&D and manufacturingof the industrial robots through equity investment. Midea has M&A plans fordeveloping the new businesses. Please refer to our notes “Access ChinaConference Highlight” published on 11 January 2016. To recap, it acquired 5.43% stake in KUKA in August 2015. We believe Mideahas established a good relationship with KUKA’s senior management teamafter its initial share purchase. Besides that Midea has established two jointventures with Yaskawa (6506.T, NR) to manufacture industrial and servicerobots in China since last August. During its 3Q15 conference call, Midea’s management had guided that it plansto install 1,700 industrial robots to enhance its manufacturing automation witha capex of RMB1bn for 2016.

FY15 core net profit increased by 7% yoy Yonghui Superstores (YH) announced preliminary results for 2015 on 1February. The company expects NP in 2015 to decline by 29% yoy toRMB606m, mainly due to corporate restructuring, investment in the Bravostores, and a weak retail environment. Excluding the investment loss ofRMB69m in Lianhua (0980.HK, NR) and the re-classification of its investmentin Zhongbai (000759.SZ, NR) as a long-term investment (equity method) from afinancial trading asset (fair value gain of RMB221m) in 2014, core NP grew 7%yoy to RMB675m, 28%/29% lower than Deutsche Bank/market estimates ofRMB944m/RMB956m, respectively. The 2015 result implies NP of RMB78mexcluding the LH investment loss booked in 4Q15. The company will announceits audited 2015 results on April 28, 2016. Deutsche Bank comment 4Q15 sales growth was 9% yoy, which implies a slight decline in SSSg vs. adecline of 1-2% in 3Q15. We expect SSSg to improve in 2016 as YH completedits business restructuring in 2015. However, we believe SSSg will remainunder pressure in 2016, as the company continues to expand its Bravo storenetwork, investing in staff recruitment and store renovations, and taking intoaccount a longer cultivating period than the the traditional Red Label store. Fore-commerce, we believe YH will work closely with JD (JD.OQ, Buy, USD25.59)to expand the O2O business. It launched the Jing Dong Dao Jia O2O servicesin 30 stores in Beijing during November-December 2015, and will expand toother cities including Chengdu, Chongqing, and Shanghai this year. Thebusiness is still in the initial stage. Please refer to our report China Consumertour takeaways published on January 22, 2016. YH held 20%/21% stakes inZhongbai/Lianhua as of September 2015.

US$5.4bn cash to acquire GE’s home appliance business; EPS enhancement Qingdao Haier announced on 15January that it had reached an agreementwith General Electric (GE) to acquire the entire assets and liabilities of GE’shome appliance business for a cash consideration of US$5.4bn (40%/60%financing by self-owned cash /bank borrowing). This deal is awaiting approvalfrom the anti-trust authorities in the US, Mexico and Canada, and registrationin China's NDRC and local Commerce Bureau and approval in the SGM. QH'sshares will continue to be suspended from 18January, pending review by theShanghai Stock Exchange. We expect this deal to enhance QH’s FY14EPS by2-5% and FY15EPS by 11-14%, assuming a 3-4% financing cost. Management: 8.2x FY15E EV/EBITDA and synergies The consideration is 8.2x FY15E EV/EBITDA, within the global comparablepeers’ and M&A deals’ range of 8-10x, according to management. QH expectsGE’s EBITDA to grow 40% yoy (32% yoy excluding one-off) in FY15, mainlydue to GE’s improved earnings capability, as it has invested USD1bn in R&D,products and manufacturing capabilities over the past three years. QH plans toleverage GE’s sales network, R&D, logistics and after-sales service network inthe US to expand the Haier and Fisher Paykel brand in the US. It aims to retainthe current management team to operate the GE business independently. Consistent global expansion strategy We believe this deal underpins QH’s globalization strategy. We think this dealwill help QH expand its market presence in the US and other counties,leveraging the GE brand. We expect this deal to enhance QH’s FY14EPS by 2-5% and FY15EPS by 11-14%, assuming a 3-4% financing cost. Valuation and risks Our primary valuation methodology is DCF, employing a COE of 9.5%, beta of1, and terminal growth rate of 2%. This produces a fair value estimate ofRMB11.51/share, implying a 15/16E P/E of 14x/12x. Company-specific risksinclude failure to integrate the acquired business and delays to the acquisition.

Carlyle withdraws bid for stake in Coway; good news for Haier Trading of Qingdao Haier has been suspended since 19 October due topossible M&A, with no update or timetable on its suspension. However,according to Bloomberg news on 11 Nov, Carlyle Group has withdrawn its bidfor the Coway stake due to the high price. To recap, Haier Group (parent ofQingdao Haier) formed a consortium with CJ Group in Oct to bid for a 31%stake in Coway (021240.KS, NR). Affinity Equity Partners and Carlyle Group arethe other bidders, according to the local press (pulsenews.co.kr). Coway – a market leader in Korean home wellness appliances Coway is a market leader in Korean home wellness appliances, its main focusbeing on health and well-being. It recorded sales of KRW2.2tr (USD2bn) in2014. According to the company’s website, its key products are water filtersand air purifiers, in which it has a 55%/44% market share in South Korea. MBKPartners acquired a 31% stake in Coway for KRW1.2tr in Aug 2012. Deutsche Bank comments We have not been able to confirm the news with Qingdao Haier. Based on pastexperiences with Sanyo and FPA, Haier normally acquires the overseas brandsthrough its parent company (Haier Group) and then injects them into the listco. We believe Haier’s water purifier business is in the Haier Group, but we don’tknow how Haier allocates the air/water purifier business among its three listedvehicles: Qingdao Haier, Haier Elec (1169.HK, Hold, HKD 14.22) and HaierHealthwise (348.HK, NR). In July 2014, Haier Elec and Haier Healthwise (27%stakes held by Haier Group) established a 51%/49% JV (Goodaymart Water) todistribute water purification products. According to the press, the consideration for the Coway stake is KRW3tr orUS$2.6bn, implying 39x FY14 PE. This is higher than Coway’s trading multipleof 26x FY14 PE as of 11 Nov. We believe this potential deal underpins Haier’s strategy of becoming a globalleading white goods brand with a diversified product portfolio. We seepotential synergy in Coway’s plans to grow its air/water purifier business inChina, while Haier has a strong local manufacturing capability and distributionnetwork and is eager to learn technical skills in manufacturing air/waterpurifiers. Qingdao Haier had net cash of RMB23bn as of 30 Sept. AssumingQingdao Haier acquires a 15.5% stake in Coway (half of the consortium’spotential stake), we estimate the acquisition would enhance its net profit by4% in FY14, given Coway’s net profit of KWR250bn in 2014. Qingdao Haier’sshares are still suspended but we maintain our Buy recommendation.

Long-term growth story retained; maintaining Buy We lower our FY16-17 forecasts by 2-3% to reflect the weaker-than-expected3Q15 sales growth and management’s revised guidance for FY16-17 top-linesales growth (mid to high single digits). Air conditioner sales declined by 20%yoy in 3Q15, and management plans to continue with the reduction of outputuntil channel inventory returns to a normal level ? by 1Q/2Q16. To recap,channel inventory fell by 20% in September versus June. We believe Midea’slong-term growth story is retained. Maintaining Buy. Top-line target cut to mid to high single digits for FY16-17 Management cut its top-line growth guidance to mid to high single digits (fromlow teens) for FY16-17 in its 3Q15 analyst conference call. We believe this is tomaintain a balance between its profitability and market share gain, withprofitability as the priority. We expect washing machines/refrigerators/smallappliances to post FY15-17 CAGRs of 13%/13%/9%, driven by the launch ofdifferentiated products and the expansion of the flagship store coverage. Weestimate a 12% net profit CAGR over FY15-17, on a sales revenue CAGR of 7%. 3Q15: sales down 9% yoy, with core net profit down 1% yoy Midea reported a 3Q15 net profit increase of 14.7% yoy, to RMB2.7bn (corenet profit down 1% yoy), owing mainly to government subsidies. Sales revenuedeclined 9% yoy, owing to a 20% yoy sales decline in air conditioners. Channelinventory fell 20% in September versus June; however, this was still high, andmanagement expects a healthy level to be reached by 1Q/2Q16, which is inline with our expectation. The GP margin declined 0.8ppt, to 23.3%, onreduced output volume and a price discount on AC. Target price fine-tuned to RMB34.09, from RMB34.79, on 12x FY16E PE; risks We lower our target price by 2% to reflect the lower-than-expected top-linegrowth. Our DCF (9.5% COE, 1.0 beta, 2% TGR) yields RMB34.09/share (old:RMB34.79), implying 13x/12x FY15/16E PE, or 1.0x PEG, which is in line withthe 0.9-1.1x PEG for the sector. Downside risks: global expansion; slower-thanexpectedde-stocking of air conditioners; fierce competition.

Sales increased 15% yoy, while NP was down 64% yoy. Yonghui announced its 3Q15 results after the market closed on 29 October2015. NP dropped 64% yoy to RMB71m due to the operating deleverage. Salesgrew 14.8% yoy to RMB11bn. For 9M15, sales increased 17% yoy, aslowdown from 18% yoy growth in 1H15. Gross margin edged up slightly by0.3 ppts to 19.3%. Opex as a percentage of sales increased 1.5 ppts to 17.7%,with selling expenses and administration expenses increasing 24%/32%,respectively, which led to an EBIT decline of 72% yoy to RMB82m in 3Q15. Balance sheet remains healthy. Accounts payable increased 47.5% yoy to RMB5.95bn. Net cash increased toRMB6.46bn as of end-3Q15 from RMB661m as of end-3Q14. Operating cashflow was RMB1.59bn as of end-September 2015, vs. RMB1.28bn as of end-September 2014. 21 stores added, while SSSg declined 1-2% yoy. The company has opened 21 new stores in 10 regions including Shanghai,Beijing, Sichuan, and Anhui in 2015, bringing the total number of stores to 372by end-September 2015. GFA increased 15.7% yoy. SSSg in 3Q15 declined 1-2% yoy. To recap, SSSg was 3-4% in 1Q15 and 0.4% for 1H15. 3Q results below our expectation. 3Q sales were 23% of our full-year estimation, which is lower than 25%/25% inFY13/14. For the strategic partnership with JD, management has not revealedthe detailed action plan. We expect the plan to include joint procurement andO2O initiatives.