Event: Gree Electric Appliances Inc of Zhuhai (000651) has its Q3 2008 report announced today. From January to September of 2008, the company realized total turnover of Rmb35.112bn (+19.6% yoy), net profit of Rmb1448mn (+86.36% yoy), ROE of 21.3%, operation net cash flow per share of Rmb0.2, and EPS of Rmb1.1561.
Our Analysis and Estimation: Income growth keeps ahead of its peers. With a year-on-year increment of 19.6%, the company’s sales income growth is far beyond the sector average as we have predicted, and this trend will continue in the future. However, we also notice that performance growing speed in Q3 2008 is slower than that of the previous two quarters; despite the current off-season, growth rebound might still be a sign of sector recession. Due to international financial fluctuation and stagnancy of domestic economy, we deem that performance growth in Q4 2008 might be probably below that of 1H2008; however, we are optimistic about its above-sector performance growth.
Sales & administrative charge rates remained stable, while financial expense surged. We project sales & administrative charge rates will still be stable in Q4 2008. As RMB appreciation slowed from Q3 2008 onwards, the company’s exchange losses will be sharply reduced in the following quarter.
Operational cash flow sharply lessened. According to the report, net cash flow created from business operation during Q1-Q3 is only Rmb246mn (-93.88% yoy). Receivable account surged by 93.84% comparing with early period of the year, which is a main reason for a stagnant cash flow-back.
Profitability improved consistently. Gross margin of the company during first three quarters of 2008 is slightly higher than corresponding period of last year. Now that raw material prices are lowered due to weak demand, and RMB appreciation is slowing down, we predict both gross profit margin and the net profit margin will be likely to improve in Q4 2008.
Investment Suggestion: Due to global financial fluctuation, air-conditioning market is weak in demand. We forecast the sector will be likely in a downturn in 2009. Fortunately, raw material price plummet has gradually eliminated negative influences of cost ascension. For the time being, we adjust our estimation towards the company’s performance growth; according to our valuation model, EPS in 2008-2010E is Rmb1.44, Rmb1.78 and Rmb2.1 respectively, representing P/E Ratio of 11x, 8.9x and 7.6x separately; as the company has already went through the sector trough, we think it worth of investment, and maintain “Recommended” rating intact.