Event: On 8 Apr, Haier Group and China CITIC Bank signedin Qingdao a strategic cooperation agreement on supply chain e-finance. Under the agreement, the existing sales/logistics/information networks of the Group’s Goodaymart will be closely connected with the Bank’s supply chain e-finance business, and a supply chain online platform featuring in online/offline integration will be set up, which will provide convenient financing and payment services for upstream and downstream enterprises on Goodaymart platform. Comments: (1) Goodaymart provides quality application scenarios for the implementation of the Bank’s supply chain e-finance Traditional supply chain finance is a kind of financing mode whereby banks connect core enterprises with upstream and downstream enterprises, and provide overall financial products and services.Take the home appliance sector for instance, banks generally focus on home appliance brand manufacturers, providing financial support for upstream and downstream enterprisesin their supply chain. In practice, given pledged assets, risk control, and other conditions, bank service still focuses on home appliance brand manufacturers, while downstream distributors usually find it hard to gain direct access to financing service due to their small-scale turnover, lack of fixed assets, among others. Goodaymart’s outlets/information systems provide a scenario for the implementation of supply chain e-finance.First, Goodaymart provides distribution, logistics, and after-sale service, matchmaking with 7.5k-plus county-level distribution stations (county-level Haier franchise stores and Goodaymart outlets), involving a total of ~35k outlets (including township distribution stations), and the distributors involved are characterized by small-scale turnover, light fixed assets, and steady cash flow. Second,Goodaymart organizes these participants in a good order via the systems and networks, and has achieved interconnectivity and intercommunication with these outlets through the in-door system. Goods purchase, sales, and inventory as well as payment settlement and write-off can be completed in a real-time manner in the system, and Goodaymart system has accumulated a sea of data information on the participants in its supply chain. The Bank can take advantage of Goodaymart to boost network-based supply chain finance and reduce credit cost and risk, which will make its capital application faster and safer. The Bank can take advantage of Goodaymart to achieve network-based supply chain finance, similar to the case where Alibaba employs Taobao platform to offer loans to Taobao stores. On theone hand, the Bank can rely on Goodaymart system data analysis, monitor distributors’ operations, and reduce cost of credit granting and credit risk; on the other hand, Goodaymart has established a financial network matching with its logistics network, and its financial network can enable real-time financial settlement with distributors; the Bank can employ Goodaymart platform to “whole-course one-stop” online credit loan model with 24/7 quick service, credit funds can directly enter upstream accounts in the supply chain, and also warrantee security in using credit funds. (2) Haier can take advantage of the Bank to increase distributor leverage, and weaken its financial risk Haier is expected to take advantage of the bank as an external force to address funding demand within its supply chain, and reduce its financial risk. Home appliance distributors used to gain access to loans mainly by three means: (i) borrowing from banks, (ii) three-party acceptance bills endorsed by manufacturers, and (iii) period of payment on open account provided by manufacturers. Among them, the last two means are common, but have two weaknesses: (i) increasing manufacturers’ financial risks, and (ii) while providing endorsement, payment period, and other supports, manufacturers generally cut sales price subsidies, implying increased financing cost of distributors in a disguised form. After the advancement in the cooperation between Haier and the Bank, funding demand in the supply chain is expected to be diverted toward the Bank, which will provide distributors with a wider range of financial services, and reduce Haier’s financial risks. Introducing financial services to improve financial leverage for distributors is in line with the trend of increasing efficiency in home appliance channels.According to the our forecast outlined in our China Home Appliance Sector Strategy Report for 2014, as the sector enters a moderate growth period from an expansion period, and e-commerce O2O model sees accelerated penetration into the traditional distribution stockpile model, there exists intrinsic demand for flattening and efficiency improvement in home appliances channels, and distributors’ profit model evolves accordingly, transforming from past hoarding and focusing on single profit toward “rapid run with small steps” to seek turnover. As channel efficiency improves, distributors will try to reduce inventory assets and strengthen financial leverage, in a bid to improve operation efficiency and ROE.Currently, Haier hasbroadly completed channel flattening and initial presence in online/offline O2O, and it will keep boosting O2O operation of its outlets at all levelsin 2014. For instance, it will step up central warehouse construction in tier-1 and tier-2 cities, and need to reserve only prototypes and a small number of inventory at its tier-1 and tier-2 community stores and franchise stores, so that after consumers experience consumption at a franchise store and the store places orders in the system, most goods can be directly delivered to consumers within 24 hours by a central warehouse closest to the franchise store. Therefore, Goodaymart system supports distributors to maintain low-inventory operation, while financial leverage improvement can rely on the Bank and other external financial resources. (3) Goodaymart system sees heightened barriers, evolving towardplatform value from logistics distribution service The partnershipbetween Goodaymart and the Bank marks Goodaymart’splatform value has started to highlight; besides providing efficient logisticsdistribution of large articles, Goodaymart isbecoming acore thresholdfor Haier’stransformationin future. (i) The partnershipbetween Goodaymart and the Bankwill provide financial servicefor upstream and downstream partners in the supply chain, and help upstreamsuppliers and downstream distributors reduce financial costand financingdifficulty, which will make supply chain partnership much firmerand beef up customerloyalty to Goodaymart system. (ii)Goodaymart logistics distribution servicesees accelerated logistics socialization. In 2013, the JV and partnershipbetween Goodaymart’schannel business and Alibaba’s e-commerce platform marked the rapid growth of the Company’s logisticssocialization; in 2013, itsacquisition of Shanghai BOYOL underscored its advantages in home furnishingand furniture distribution service by virtue of M&As. Its logistics businessis estimated to have grown 17% in 2013E. With its deepening cooperation with AlibabaandShanghai BOYOL, its logistics business is projected to keep growing rapidly in 2014E. (iii) E-commerce O2O, small-scale customization service, and other new business models need to be implemented via Goodaymart. Goodaymart system has opened up thechannel between manufacturers and retailers, with onlyGoodaymartstandingbetween online/offlineandsales distribution. Featuring in high efficiency and flattening, Goodaymart played a decisive role in delivery in three days for online shopping, small-scale customization of refrigerators, and other events in 2013. Potential risks: (i) Slower-than-expected cooperation-as upstream and downstream financing demands in thehome appliancesector are related with pricing, sales policy, and other factors, financial leveragewon’t be heightened blindly; additionally, Goodaymart lackscredit management experience, so Goodaymartand the Bankwill see a run-in periodfor system matchmaking, cooperation, and customer development. (ii) Competitors’accelerated development-its competitors includingMidea boast proprietarylogistics companies, many retail outlets, and a variety of basic resources of after-sale service outlets, which, based onefficient organizationand continued input, may constitute a distributionsystem for large articles similar to thatof Goodaymart; and(iii) Sector operation-macro economic downturnandreal estate sales contraction will dampen home appliance consumptionin future. Investment advice: Haier Group and China CITIC Bank inked a strategic cooperation agreement on supply chain e-finance, and Goodaymart network and data system provide quality application scenarios for the latter’s supply chain e-finance. On the one hand, the Bank may reduce credit cost and risk, and enable 24/7 real-time services. On the other side, Haier can take advantage of the Bank to increase distributor leverage, and weaken its financial risk, and Goodaymart’s logistics service and the Bank’s credit service will boost its distributors’ profitability to pick up. The cooperation marks that Goodaymart evolvesfrom logistics service value toward platform business value, Goodaymart customer loyalty and barriers will be heightened, and e-commerce O2O, small-scale customization, and other new business models will be materialized via Goodaymart. We reiterate its 2013/14/15E EPS of Rmb1.50/1.70/2.00 and “BUY” rating.