格力电器(000651)

Valuation remains inexpensive at 11/11x 17/18 PE and 5% yield

Gree’s 2Q17 NP beat DB/market estimates by 35%/17% due to sales growthacceleration and operating leverage. We believe channel inventory remains at ahealthy level at the beginning of the cold year (end of July). Thus, we raised oursales forecasts for 2017-2019 by 7-9%. Meanwhile, we lower our 2017 GPMforecast by 1.6ppt to reflect raw material price hike pressure in 2H17. Although2018 will be a tough year given high base in 2017 due to property boom andrestocking, we believe product upgrades and relatively inexpensive valuationwith 5% yield warrants a Buy recommendation.

2H17 outlook �C channel inventory remains healthy but more pressure on GPM

For 2H17, we expect Gree to report a 19% rise in sales with 10% increase involume as we believe the current channel inventory level remains healthy(~21m units). Meanwhile, we expect GPM to decline 1.3ppt to 31.4% from32.7% in 1H17 due to continuous raw material price increase. However, opexratio might remain low as demand remains strong. We expect EBITM of 15%in 2H17 (15.5% in 1H17).

2Q17 NP beat due to sales growth acceleration and operating leverage

2Q17 saw NP up 68% on sales up by 60% vs 1Q sales/NP up by 19%/27%,mainly thanks to restocking cycle and strong demand from retail end. GPMshrank 8ppt to 30.2% affected by raw materials cost hike, while opex ratiocontracted 12.6% to 14.1%. Thus, the company still enjoys an operatingleverage with EBIT margin improving 7.6ppt to 16%.

Raising target price to RMB44.4 from RMB38.87; risks

We use DCF to value the company with a new target price of RMB44.4 (oldRMB38.87), as we raise our FY17-FY19 NP forecast by 7-9%. Our target priceimplies 13x/12x FY17/18 PE, which is at a premium to its historical valuationpoint during de-stocking of channel inventory, and dividend yield at 4.6% forFY17E. Downside risks include competition, subsidy policy, and M&A.