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. 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, the D-share would then trade at a future theoretical multiple of 4.4x 2021e PE / 7.5% 2021e dividend yield.
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