Deep-dive 2020-2: Haier Smart Home Co Ltd D-Share
Haier Smart Home (690D GR) is one of China's largest home appliance manufacturers, offering everything from air conditioners to kitchen appliances.
Since its founding in 1984, Haier Group chairman Zhang Ruimin has taken the company from a loss-making state-owned refrigerator factory into a global giant. Zhang Ruimin is still in charge and is now putting his focus on international expansion. GE Appliances was acquired in 2016 for US$5.4 billion and the company is quietly acquiring businesses in Europe as well. Haier wants to use these distribution channels to push high quality products at low prices to global consumers.
Haier has a complex corporate structure. But that's exactly where the opportunity is. After an IPO in Germany in 2018 of a new "D-share", Haier has been left with an international listing that almost no-one pays attention to. The D-share is down 33% from the IPO price, which itself was done at very attractive levels. After the Coronavirus pandemic, the stock fell significantly on low liquidity and has not recovered - despite a strong improvement in the underlying business.
What will happen at the end of 2020 is that mainland-listed company will merge with its Hong Kong-listed subsidiary "Haier Electronics" and thereby gain a Hong Kong listing for Haier. After the transaction, Haier Smart Home will be simultaneously listed on the mainland, in Hong Kong and in Germany. We believe that the Hong Kong-listed stock will become an institutional favorite and covered by most major international investment banks. That will put the spotlight on the D-share, which will offer the same cash flow rights and voting rights as the Hong Kong-listed stock (though regulated by a different entity - China's CSRC rather than Hong Kong's SFC). While the D-share and H-share won't be fully fungible, chances are that they will trade at a similar level after adjusting for liquidity. Capital can flow freely between Hong Kong and Germany, so it would be unusual to see the H-share trade at say twice the multiple of the shares in Germany.
With this backdrop of improving underlying business and a D-share trading at 4.4x 2021e PE / 7.5% 2021e dividend yield, the stock is simply too inexpensive to ignore. There is a good chance that the valuation discrepancy will disappear once Haier Smart Home attains its listing in Hong Kong. Even if not, a 7.5% sustainable dividend yield (rising to 10%+ by 2023) is attractive enough to make the stock a long-term position in a value-focused portfolio.
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The above article and PowerPoint presentation constitute the author’s personal views only and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. The author may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. Disclosure – we do hold a position in Haier Smart Home D-share at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION).
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